VALUE  FOR  RATE  MAKING  PURPOSES 


BY 


HENRY  EMMETT  BARTLETT 

B.S.  in  C.E.  University  of  Illinois,  1893 


THESIS 

SUBMITTED  IN  PARTIAL  FULFILLMENT  OF  THE  REQUIREMENTS 
FOR  THE  DEGREE  OF  CIVIL  ENGINEER 
IN  THE  GRADUATE  SCHOOL  OF  THE  UNIVERSITY 
OF  ILLINOIS,  1922 


URBANA,  ILLINOIS 


Digitized  by  the  Internet  Archive 
in  2015 


https://archive.org/details/valueforratemakiOObart 


IITTRODUCTIOI 1 

Reasons  for  Present  Confusion  in  Appraisal  Methods  ...  2 

Actual  Cost  as  '’Natural”  Method  of  Appraisal 3 

Experience  of  Author  3 

PUBLIC  UTILITIES  6 

Defined  6 

In  Illinois 7 

Regulation  hy  Public  Authority  in  General  7 

Discussion  of  Paving  in  Street  Railway  Tracks  8 

Reed  of  Regulation  9 

Discussion  of  Early  Railroad  Abuses  and  Their  Effects  . . 9 

Regulation  in  General  11 

Regulation  by  Municipalities  12 

Evils  of  Limited  Eranchises 13 

Regulation  by  State  Authority  ......  16 

Regulation  by  Eederal  Authority  18 


PUBLIC  UTILITY  RATE  MAKIUG  19 

Underlying  Principles  19 

Rate  Making  by  Municipal  Authorities 21 

Organization  of  Stp«te  Regulatory  Coirmiissions 24 

Req.uireirients  for  Membership  on  State  Commissions  ....  24 

Regulation  by  Federal  Authority  . 26 


VALUE 29 

General  Discussion  29 

Values  for  Various  Purposes  29 

Condemnation  Value  31 

Taxable  Value 32 

Special  Values  33 

Rate  Making  Value 34 

Ascertainment  of  Rate  Making  Value 35 

Elements  of  Value 42 

Appraisals 42 

Practical  Making  of  Public  Utility  Appraisals  44 

Method  of  Appraise.,1  of  Portsmouth  Street  Railroad  & L't  . 44 

Bases  of  Appraisals 47 

Origins,!  Cost  to  Date 43 

Historical  Reproduction  49 

Cost  of  Reproduction  at  Present  Prices 51 

Cost  of  Reproduction  Using  Average  Prices  55 

Rate  Base 58 

Value  of  Land 52 

Overheads 54 

Intangibles 55 


VALUE:  (Oont'd)  Page 


Depreciation  66 

Other  Elements  of  Va.lue 69 

Bases  of  Valuation  Used  hy  State  Commissions 70 

Questionnaire  sent  to  State  Commissions  hy  H.  E.  Bartlett  . 71 

Sunmiaries  of  Replies  to  Questionnaire 73  to  81 


General  Discussion  of  Replies  from  State  Commissions  ...  81 

Tabular  Statement  of  Valuation  Bases  used  by  Commissions  . 83 

Synopsis  of  Replies  to  Questionnaire  Arranged  by  Groups  , . 84 

Argument  for  Undepreciated  Actual  Cost  as  True  Rate  Base.  . 86 

Inconsistencies  in  Reproduction  Valuations 91 

Example  of  Railroad  Constructed  through  Large  City  ....  92 

■ Example  of  Street  Railway  in  Paving  93 

Inconsistencies  of  Average-Price  Valuations  94 

Example  of  Obsolete  Type  of  Pump 95 

Example  of  Recently  Purchased  Article  such  as  Duplex  Exciter  95 
Relative  Costs  by  Several  Methods  of  Appraisal.  ......  97 

TRUE  RATE  BASE 98 

Considered  as  Undeprecia.ted  Actual  Cost 98 

Property  Included  in  True  Rate  Base 99 

Reasons  for  Advocating  Actual  Cost  as  True  Rate  Base  ...  99 

Possibility  of  Ascertaining  Actual  Cost  from  Books  ....  101 

Actual  Cost  Reflects  Sacrifice  of  Ov-mers 102 

Keeping  of  Books  by  Reproduction  Appraisals  103 

Suggestion  of  Unity  of  Action  among  State  Commissions  . . . 104 
Synopsis  of  Attitudes  of  Commissions  on  Bases  of  Appraisals  105 

Quotation  from  Letter  of  Texas  Commission  ...  108 

Conclusions  from  Synopses  of  Bases  of  Appraisals  109 

Court  and  Commission  Decisions  Concerning  Rate  Base  ....  110 
Argument  for  Liberal  Treatment  of  Public  Utilities  ....  Ill 


CITATIOITS 

AERA 40 

DES  MCIITES  GAS  CASE 66 

MIMESOTA  RATE  CASES 37-54-63-93 

SMYTH  V.AI.IES 36 

SPRIITGFIELD  GAS  CASE 38-66 

IIEW  JEItSEY  BOARD  OF  PUBLIC  UTILITY  COMMISSIOITERS 110 

WESTERII  ADVANCE  RATE  CASE 110 


VALUE  FOR  RATE  MAKIFG  PURPOSES 

By 

H,  E*  Bartlett 
1447  East  66th  Place 
Chicago 

-cOo- 

lUTRODUCTIOlT 

The  regulation  hy  governmental  authority  of  corporations  fur- 
nishing public  services  has  become  an  accepted  part  of  the  econom- 
ic system  of  the  united  States.  Beginning  shortly  after  the  Civ- 
il War,  and  at  first  progressing  slowly,  the  idea  novir  has  spread 
until  nearly  every  state  in  the  union  has  a commission  with  regu- 
latory powers  of  greater  or  less  extent.  Many  of  these  comniissions 
ha,ve  wide  authority  over  the  rates  charged  by  public  service  cor- 
porations, and  the  principles  governing  the  determination  of  such 
j rates  are  fairly  well  understood. 

I One  of  the  basic  principles  of  rate  making  is  that  a public 

I 

utility  enterprise  is  entitled  to  a reasonable  rate  of  return  upon 
the  fair  value  of  the  property  which  it  necessarily  devotes  to  the 
public  service.  This  principle  is  so  well  settled  by  commission 
practice  and  by  decisions  of  our  highest  courts  as  no  longer  to  be 
open  to  discussion.  While  the  right  to  a reasonable  return  is  thus 
firmly  established,  nevertheless  the  procedure  necessary  in  determi- 


ining  the  fair  value  of  the  property  remains  undecided,  and  forms 
one  of  the  most  vexatious  q,uestions  commonly  arising  during  the 
progress  of  an  inq.uiry  into  rates. 

Much  of  the  prevailing  confusion  in  this  respect  is  clearly 
chargeable  to  our  courts  by  reason  of  their  failure  to  lay  down 
specific  rules  for  the  determination  of  fair  value.  However,  back 
of  the  failure  of  the  courts  to  exactly  define  this  value  lies  the 
failure  of  regulatory  bodies  to  come  to  any  substantial  basis  of 
agreeuient  along  these  lines.  And  theirs  is  the  duty  in  the  first 
instance,  for  by  law  they  are  charged  directly  with  that  responsi- 
bility, The  courts  can  decide  ctuestions  only  in  the  light  of  the 
evidence  presented  to  them,  and  it  is  small  wonder  their  decisions 
lack  desirable  exactness  when  there  is  so  little  agreement  among 
authorities  as  to  Just  what  constitutes  proper  value  for  rate  mak- 
ing purposes,  I have  no  doubt  thax^ if  regulatory  commissions  come 
to  substantial  agreement  as  to  what  constitutes  fair  value^that  in 
! due  course  of  time  their  opinions  will  be  reflected  in  decisions  of 
the  00  urts , 

While  there  has  been  a vast  aruount  of  discussion  of  valuation 
I q.uestions,  and  numerous  volumes  have  been  written  thereon,  never- 

I 

theless  the  writer  hopes  to  present  certain  phases  of  the  subject 
in  such  manner  as  to  clearly  set  forth  his  convictions  in  the  mat- 
ter, From  the  experience  gained  by  him  in  practical  valuation  and 
rate  making  work  he  has  been  forced  to  the  conclusion  that  the  de- 
termination of  the  fair  rate  making  value  of  a property  presents 
no  insuperable  obstacles,  and  that,  instead  of  there  being 


* . ^ 


3 

a nuniber  of  methods  of  determining  this  amount,  there  really  is  hut 
one,  and  that  one  the  simplest  and  clearest  of  all.  Briefly,  the 
value  to  which  I refer  is  the  undepreciated  actual  cost  of  the  es- 
sential property  devoted  to  the  public  service. 

Practically  my  first  experience  in  valuation  work  came  while 
I was  employed  as  assistant  engineer  of  terminals  by  the  Chicago 
Association  of  Oormnerce  Committee  of  Investigation  on  Smoke  Abate- 
ment and  Electrification  of  Chicago  Terminals,  Part  of  my  work  in 
that  capacity  consisted  in  making  a valuation  of  the  steam  railroad 
facilities  that  would  be  displaced  in  the  event  of  electrification, 
such  as  engine  houses,  coal  and  water  stauions,  turntables,  certain 
shop  machinery,  and  similar  articles,  ¥ot  having  read  the  current 
twaddle  on  ’'theories”  of  valuation,  1 q.uite  naturally  turned  toward 
the  ascertainment  of  the  actual  cost  of  the  above-named  structures 
as  affording  the  proper  basis  for  the  work,  and  carried  it  through 
on  those  lines.  Inasmuch  as,  under  similar  circumstances,  nearly 
all  other  persons  engaged  on  similar  work  would  have  done  likewise, 
I have  arrived  at  the  conclusion  that  actual  cost  forms  the  natural 
method  of  valuation. 

During  the  five  years  immediately  following  the  above-mention- 
ed work,  or,  to  be  eza.ct,  from  November,  1915,  to  February,  1921,  I 
was  employed  as  assistant  chief  engineer  of  the  Illinois  Public  u- 
tilities  Commission,  and  during  that  time  I had  much  to  do  with  the 
practical,  side  of  making  rates  for  public  utility  services.  This 
experience  was  rendered  the  more  varied  and  extended  by  reason  of 
the  fact  that  during  this  time  the  International  War  was  begun  and 


4 

concluded.  This  period  was  marked  hy  such  rapid  and  abnormal 
price  changes  as  to  sorely  tax  the  facilities  of  the  Commission  to 
care  for  the  numerous  rate  cases  that  were  brought  before  it  and 
to  give  anywhere  near  the  adequate  consideration  required  in  many 
instances . 

During  this  period  I prepared  in  behalf  of  the  Comiriission  ap- 
praisals of  two  small  steam  railroad  properties,  one  large  inter- 
urban  railroad  property,  and  a number  of  street  railways.  I also 
checked  scores  of  a,pprai8p.ls  prepared  by  engineers  and  submitted 
to  the  commission  in  various  rate  cases.  I'urther,  during  these 
years  there  was  completed  the  principal  portion  of  the  field  work 
in  connection  with  the  Federal  valuation  of  the  steam  railroad 
properties  in  the  United  States.  Under  the  provisions  of  the  act 
of  Congress,  as  soon  as  the  valua.tion  of  any  railroad  property  was 
completed  in  each  of  the  states,  the  report  was  submitted  to  the 
Governor  of  that  state.  In  the  practical  working  out  of  this  pro- 
vision in  Illinois,  these  reports  were  transmitted  by  the  Governor 
to  the  Public  Utilities  Conimission.  By  official  action  of  the  Com- 
mission early  in  1916,  the  writer  ws,s  delegated  to  check  over  the 
reports  as  received  and  present  the  results  of  the  work  for  such 
action  as  the  Commission  cared  to  take.  In  preparation  for  this 
work  careful  study  was  made  of  the  numerous  briefs  and  other  arti- 
cles submitted  in  advocacy  of,  or  opposition  to,  the  contentions 
of  the  railroads , 

Aside  from  the  q.uestions  arising  in  connection  with  the  valu- 
ation of  public  utility  properties,  the  v/riter  also  prepared  many 


i' 


<( 


5 


opinions  and  orders  of  the  OorQnission  in  ra,te  cases  Involving  gas, 
electric,  water,  steam  and  hot  water  heating,  and  street  and  inter- 
urhan  railway  services.  In  addition  thereto,  he  has  sat  as  exam- 
iner for  the  Commission  in  many  hundreds  of  rate  and  other  cases, 
this  work  req.uiring  a familiarity  with  regulatory  practice. 

Since  leaving  the  Commission  I have  "been  continuously  in  charge 
of  the  appraisals  of  public  utility  properties,  prepared  at  the  in- 
sta.nce  of  the  owners  of  the  properties,  and  embracing  one  gas,  two 
street  railways,  one  interurban  railway,  one  steam  heating,  and 
three  electric  light  and  power  systems.  In  each  of  the  last-named 
cases  appraisals  were  prepared  on  bases  of  historical  reproduction 
cost  and  the  cost  of  reproduction  using  either  five-year  or  ten- 
year  average  prices . 

from  the  foregoing  it  will  be  seen  that  the  writer  has  been 
engaged  on  "both  sides  the  fence*'  in  valuation  and  rate  matters, 
and, as  a result  of  his  experience,  has  come  to  have  q.uite  fixed 
views  concerning  the  proper  values  to  place  upon  properties  in  rate 
cases,  and  in  the  following  pa,ges  will  attempt  to  justify  these 
conclusions.  Briefly,  as  previously  stated,  in  my  opinion,  the 
true  rate  making  value  of  a public  utility  property  is  represented 
by  the  actual  investment  therein.  This  ainount  should  not  be  de- 
preciated except  in  rare  instances  where  the  management  has  been 
wasteful,  improper,  or  where  money  has  been  paid  out  in  excessive 
dividends  when  it  should  have  gone  into  the  upkeep  nf  the  plant. 

Inasmuch  as  the  value  herein  considered  has  mainly  to  do  with 


6 


the  fixing  of  the  sum  upon  which  a puhlio  utility  may  justly  ex- 
pect to  earn  a reasonable  return  in  the  way  of  rates  for  its  ser- 
vices, it  appears  logical  to  first  inq.uire  as  to  what  constitutes 
a so-called  public  utility,  and  what  distinguishes  it  from  other 
business  enterprises  in  a community. 


PUBLIC  UTILITIES 

A public  utility  may  be  defined  as  a business  enterprise  fur- 
nishing a service  essential  to  the  public  convenience,  and  of 
such  a nature  that  it  should  form  a practical  monopoly  in  the  com- 
munity, Commonly  a considerable  portion  of  the  plant  of  such  a 
corporation  will  be  located  along  or  under  the  streets  and  high- 
ways or  upon  other  public  property,  and,  as  tenant  or  user  there- 
of, becomes  subject  to  certain  control  or  regulation  by  the  coimnun- 
ity  or  by  the  paramount  authority  of  the  state.  Usually,  too,  a 
public  utility  aoq.uires  certain  privileges  not  granted  to  other 
businesses,  among  which  may  be  mentioned  the  right  of  eminent  do- 
main, or  of  preferment  in  the  allotment  of  fuel  during  strikes, 
war,  or  other  calamity.  These  privileges  logically  carry  with 
them  the  right  of  control  by  the  public  to  the  end  that  the  enter- 
prise shall  be  conducted  in  the  interests  of  the  community,  and 
that  all  citizens  shall  be  served  without  discrimination  or  prefer- 


7 


ment,  and  at  rates  that  are  just  and  reasonable  to  the  company  and 
to  its  consumers. 

The  powers  granted  the  Illinois  Commerce  Coramissiort  and  its 
predecessor  the  Public  Utilities  Commission  are  probably  as  broad 
as  those  of  any  coinmission  in  the  United  States,  In  the  act  of 
June  29,  1921,  creating  the  Illinois  Commerce  Commission,  a public 
utility  is  defined  as  follows: 

"The  term  ‘public  utility,  when  used  in  this  Act,  means  and 
includes  every  corporation,  company,  association,  joint  stock  comp- 
any or  association,  firm,  partnership  or  individual,  their  lessees, 
trustees,  or  receivers  appointed  by  any  court  whatsoever  (.except, 
however,  such  public  utilities  as  are  or  may  hereafter  be  owned  or 
operated  by  any  transportation  district  or  other  municipality,  and 
except  such  telephone  company  or  companies  which  are  or  may  here- 
after be  purely  mutual  concerns,  having  no  rates  or  charges  for 
services,  but  paying  the  operating  expenses  by  assessment  upon  the 
members  of  such  company  or  companies  and  no  other  person  or  per- 
sons) that  now  or  hereafter:" 

’Ua)  May  own,  control,  operate,  or  manage,  within  the  State, 
directly  or  indirectly,  for  public  use,  any  plant,  eq.uipment  or 
property  used  or  to  be  used  for  or  in  connection  with  the  transpor- 
tation of  persons  or  property  or  the  transmission  of  telegraph  or 
telephone  messages  between  points  within  this  Sta,te;  or  for  the 
production,  storage,  transmission,  sale,  delivery  or  furnishing  of 
heat,  coal,  light,  power,  electricity  or  water;  or  for  the  convey- 
ance of  oil  or  gas  by  pipe  line;  or  for  the  storage  or  warehousing 
of  grain;  or  for  the  conduct  of  the  business  of  a wharfinger,  or 
that" 

" ib ) May  own  or  control  any  franchise,  license,  permit  or 
right  to  engage  in  any  such  business,"  Section  10  of  Article  I of 
Act  Approved  June  29,  1921;  effective  July  1,  1921). 

Regulation  of  utility  properties  by  public  authority  has  been 
practiced  for  many  years  and  to  varying  degrees  in  different  com- 
munities. Almost  without  exception,  franchises  granted  such  enter- 
prises by  municipal  authorities  have  provided  some  degree  of  con- 
trol over  the  conduct  of  the  business  of  the  company.  Primarily, 


suoli  control  arose  from  the  fact  that  the  company  occupied  streets 
or  other  public  property  with  portions  of  its  plant,  and  q.uite  nat- 
urally the  public  sought  to  protect  its  rights  by  stringent  con- 
tract regulations.  Incidentally  it  was  common  practice  to  drive 
the  hardest  bargain  possible  for  the  use  of  the  public  highways, 
for,  it  was  argued,  the  more  the  public  got  for  the  privilege  the 
better  off  it  was.  Even  today  this  viewpoint  is  assumed  by  mia,ny 
city  officials  who,  ignorant  of  the  true  character  of  public  regu- 
lation, imagine  the  amounts  they  secure  from  utility  enterprises 
are  that  much  clear  gain.  They  q.uite  overlook  the  fundamental  con- 
cept that,  in  the  end,  the  consumers  of  the  services  (which  is  the 
public  itself)  commonly  pay  all  the  service  costs,  including  a 
profit  on  the  transaction.  In  other  words,  they  finally  reimburse 
the  utility  for  the  sums  expended  by  it  for  the  privileges  of  using 
the  public  property,  and,  in  addition,  a return  upon  those  amounts. 
Thus,  when  a municipality  compels  a street  car  company  to  pave  its 
tracks  for  the  privilege  of  using  the  street,  it  merely  transfers 
the  burden  from  one  set  of  citizens  to  another.  That  is,  the  abut- 
ting property  owner  is  relieved  of  the  burden  and  the  oar  riders 
are  forced  to  take  it  up.  Thus  is  one  portion  of  the  community 
discriminated  against  in  favor  of  another,  for  on  streets  where 
there  are  no  oar  tracks  the  abutting  property  owner  is  reciuired  to 
pay  for  the  paving  to  the  center  of  the  street,  while  his  neighbor, 
who  may  own  higher-priced  real  estate  fronting  on  a street  car  line 
is  relieved  of  a part  of  his  just  burden  by  the  car  riders. 


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Heed  of  Re;;;ulation : That  public  regulation  of  the  acta  and 

practices  of  those  who  serve  it  is  necessary  appears  well  attested 
by  the  wide  range  of  such  control.  To  an  impartial  student  of  the 
matter,  the  regulation  of  such  enterprises  by  public  authority  ap- 
pears a direct  seg.uel  to  the  necessity  therefor.  Many  of  the  older 
generation  are  familiar  with  the  early  railroad  abuses,  such  as 
stock  juggling,  rebates,  discriminatory  rates,  land  and  townsite 
promotions,  and  other  evil  practices  which  gave  rise  to  widespread 
dissatisfaction  among  the  general  public.  Our  forefathers  recog- 
nized that  improved  transportation  facilities  formed  an  invaluable 
adjunct  to  the  commercial  life  of  the  nation,  and  were  extremely 
liberal  in  giving  aid  to  the  construction  of  railroads  by  subsidies 
la.nd  grants,  and  other  agencies.  These  corporations  owed  their 
very  existence  to  the  aid  thus  given  and  the  powers  conferred  on 
them  by  government.  ITevertheless , many  of  the  short-sighted  per- 
sons who  were  then  in  control  of  railroad  affairs  flagrantly  abused 
the  confidence  the  public  had  reposed  in  them,  forgot  their 
duty  to  it,  and  gratitude  was  a word  not  in  their  lexicons.  There 
followed  an  era  of  railroad  exploitation,  and  in  the  end  the  public 
turned  upon  its  erstwhile  servants,  and  this  generation  has  not 
seen  the  end  of  the  restrictions  that  have  been  fastened  upon  the 
common  carriers  of  the  united  States.  Indeed,  I am  of  the  opinion 
that  early  conditions  now  have  been  reversed,  and  the  public  at 
present  forms  the  oppressor.  In  substantiation  of  my  position  may 
be  cited  the  Transportation  Act  through  which  Congress  has  largely 
deprived  the  railroads  of  initiative  and  efficiency  in  operation. 


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10 

and,  in  effect,  has  turned  the  transportation  systems  over  to  the 
tender  mercies  of  the  labor  unions,  with  the  result  that  the  re- 
mainder  of  the  public  now  is  paying  the  fiddler  the  high  price  of 
the  political  buncombe  that  is  so  profusely  disseminated  from 
Washington. 

! 

The  early  history  of  the  street  rail?my  industry  in  the  unit-  ! 

! 

ed  States  is  much  the  same  as  that  of  the  steain  railroads,  and  many! 
of  the  pioneers  in  that  field  brought  infamy  to  themselves a wor- 
thy business,  and  financial  distress  alike  upon  the  deserving  and 
the  undeserving.  What  the  powers  at  Washington  arrogate  to  them- 
selves in  the  way  of  mismanagement  of  steam  railroad  transportation 
systems,  many  petty  politicians  of  lesser  calibre  attempt  in  the 
oases  of  the  street  railways.  Proof  of  this  statement  may  be  had 
in  abundance  right  here  in  Chicago,  where  the  traction  q.uestion 
has  furnished  the  political  dust  for  blinding  the  electorate  by 
self-styled  "saviors  of  the  people"  for  the  past  twenty-five  years, 
and  the  platform  on  which  mayors  have  been  voted  into  office  by  an 
asinine  public,  ably  assisted  by  the  so-called  "yellow"  newspapers. 
The  history  of  traction  in  lew  York,  Chicago,  and  other  large  cen-  j 
ters  has  been  duplicated  on  a relative  scale  in  nearly  every  other  | 
city  in  the  country  that  has  a street  railway.  What  wonder,  then, 
that  public  regulation  now  has  clamped  the  lid  on  almost  every  form 
of  street  railway  activity  and  practically  throttled  the  industry? 
Nearly  every  municipality  of  any  considerable  size  has  had  its  pa- 
rade to  mark  the  opening  of  a street  railway  line,  and  later  has 


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11 

had  presented  the  speotacle  of  the  city  officials  heating  the  tom- 
toms summoning  the  populace  to  view  the  lingering  death  of  the  u- 
tility  from  starvation,  brought  on  hy  inability  to  secure  a just 
and  reasonable  rate  for  the  transportation  it  sells. 

Regulation  in  General;  Regulation  of  public  utility  enter- 
prises is  practiced  to  a greater  or  less  degree  by  numerous  gov- 
ermnental  agencies  in  the  united  States.  There  scarcely  Is  a pub- 
lic authority  that  does  not  have  some  degree  of  control  over  them, 
from  the  district  school  or  township  official,  who  must  give  his 
consent  to  the  use  of  a school  ground  or  highway  for  a transmission 
line;  the  city  officials  who  must  grant  the  privilege  of  installing 
a street  railway  system  of  more  or  less  magnitude;  on  up  to  the 
Interstate  Commerce  Commission,  which  has  almost  complete  control 
over  the  vast  railroad  systems  of  our  country.  J'rom  the  widespread 
character  of  regulation  it  easily  may  be  inferred  that  it  is  not 
only  necessary  but  desirable.  To  the  policy  of  wise  and  just  reg- 
ulation of  public  utilities  by  comiaissions  composed  of  able  and 
fearless  men  I am  g.uite  committed.  But  to  the  ordinary  type  of 
political  regulation,  where  punishment  is  meted  out  to  corporations 
to  satisfy  the  prevalent  hatred  of  them  which  is  born  of  ighorance 
and  misunderstanding,  or  where  rates  are  fixed  in  fulfillment  of 
campaign  promises,  as  sometimes  appears  the  case,  I am  unalterably 
opposed.  Such  actions  are  not  regulation  but  irresponsible  exer- 
cise of  arbitrary  power  of  such  nature  that  t^ey^  are  repugnant  to 
both  our  laws  and  the  innate  sense  of  justice  with  which  the  human 


, 12” 

mind  is  endowed.  Unless  regulation  Ue  fair  it  can  have  no  excuse 
for  existence. 

Regulation  by  Municipalities:  Regulation  of  public  utilities 

by  municipalities  generally  has  taken  the  form  of  embodying  in 
franchise  ordinances  various  provisions  regarding  the  rates  which 
might  be  charged  by  the  company,  or  the  amount  and  character  of  the 
service  it  should  furnish.  Where  no  superior  regulatory  authority 
exercises  jurisdiction,  municipal  control  is  usually  paraiiiount,  and 
still  is  widely  prevalent.  This  control  generally  functions 
through  action  by  the  city  or  village  council,  but  sometimes  it  is 
in  the  hands  of  designated  city  officials  who,  in  turn,  are  res- 
ponsible to  that  body. 

To  those  who  are  familiar  with  the  average  city  council  in  the 
United  States  there  is  little  need  to  explain  why  that  form  of  reg- 
ulation has  proved  so  dismal  a failure.  Americans  are  prone  to  e- 
lect  to  public  office  men  whom  they  would  not  consider  for  an  in- 
stant as  employes  in  conducting  their  private  businesses.  Later 
they  deplore  the  lack  of  results  secured,  and  - elect  another  set 
of  officials  of  the  same  kind.  The  average  member  of  a city 
council  has  no  special  training  for  his  important  duties,  and  fre- 
q.uently  is  not  capable  of  exercising  any  great  amount  of  intelli- 
gence in  handling  technical  q.uestions.  Sometimes  his  actions  are 
governed  by  desire  for  party  success,  wish  to  be  re-elected,  or 
the  more  despicable  motive  of  personal  gain.  In  such  oases  the 


13 

evil  pesultB  flowing  from  this  type  of  regulation  are  far  worse 
than  the  ills  against  which  public  control  is  supposed  to  protect. 

For  these  reasons  municipal  regulation  has  become  a by-word 
for  political  corruption  and  oppression  of  the  worst  sort,  render- 
ed all  the  more  onerous  because  it  is  done  under  cover  of  the  law,  | 

! 

indeed,  freq.uently  by  the  blatant  demagogue  seeking  office.  I’he  I 

I 

evils  forced  upon  the  public  by  official  vendors  of  franchises, 
selected  by  the  public  to  protect  its  rights,  probably  were  never 
eq.ualled  by  the  predatory  selfishness  of  those  who  purchased  them 
in  bygone  days.  For  the  time  easily  can  be  remembered  by  those  not 
yet  old  when  the  possession  of  a franchise  for  a street  railway  or 
other  utility  was  considered  the  Midas  wand  which  transformed  all 
the  operations  of  the  company  into  storehouses  of  gold  flowing 

I 

from  the  pockets  of  the  community.  Now  many  of  the  holders  of  such 
franchises  have  been  disillusioned  to  their  financial  sorrow,  and 
the  corruption  wrought  through  the  agencies  of  this  form  of  specu- 
lation is  far  less  pronounced  than  formerly. 

Born  of  experience,  the  conviction  is  strong  within  me  that 
the  limited  term  franchise  commonly  granted  by  American  cities,  is 
an  unmitigated  source  of  evil,  one  of  which  is  stated  above,  i 
have  spent  an  entire  evening  listening  to  the  recital,  by  an  attorn- 
ey who  ha-ndled  franchise  matters  for  a traction  company,  of  tables 
in  which  corruption  money  was  brazenly  solicited  by  the  paid  ser- 
vants of  the  people.  The  company  and  the  public  officials  both 
were  guilty,  but  of  the  two  I am  convinced  the  public  officials 
were  the  worse  offenders,  for,  in  addition  to  their  other  trans- 


14 

gresBions,  they  were  traitors  to  those  who  placed  therii  in  their 
public  positions  for  a specific  purpose  - that  of  protecting  the 
very  interests  which  they  so  grossly  bartered  away.  It  is  a fore- 
gone conclusion  the  traction  company  would  not  have  given  the  mon- 
ey for  the  favors  it  received  unless  it  had  been  necessary.  Hence, E 
not  only  did  the  dishonest  officisJs  betray  their  fellow-citizens, 
but  they  fastened  upon  them  extortionate  rates,  for  it  may  be  as- 
sumed that  the  company  who  thus  secured  the  favors  was  out  to  make 
money,  and  that  they  exacted  b,  return  upon  all  money  paid  out  by 
them,  including  that  which  was  wrongfully  used. 

Franchise  provisions  also  sometimes  form  sources  of  discrimi- 
nation between  communities.  Examples  of  this  may  be  seen  in  the 
case  of  an  interurban  railroad  traversing  a number  of  adjacent  com- 
munities. The  company  may  have  franchises  for  varying  periods,  and 
when  one  of  these  expires  it  is  forced  to  renew  the  grant  on  the 
best  terms  it  can  obtain  from  the  Diunicipality . In  such  cases  the 
municipa.lity  freq.uently  considers  it  good  business  to  impose  bur- 
densome req.uirement-s  upon  the  company  in  the  way  of  paving,  con- 
struction of  depots,  or  other  outlays.  The  other  communities  may 
follow  a more  enlightened  policy  and  not  require  such  outlays.  In 
this  event  it  is  plain  that  the  first-named  community  not  only 
holds  up  the  company,  but  it  also  takes  advantage  of  its  neighbors. 
For  the  company  must  earn  the  money  to  pay  for  these  outlays,  and 
the  earnings  must  come  from  its  passengers,  who  live  in  all  the 
corrmunities  it  traverses.  Hence,  if  by  reason  of  expiring  fran- 


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15 

chises  a ooimniinity  is  enabled  to  take  undue  advantage  of  the  comp- 
any, it  at  the  same  time  takes  an  unjust  toll  from  its  neighboring 
citizens . 

A further  vital  feature  that  greatly  limits  the  usefulness  of 
municipal  regulation  is  the  relatively  small  territory  in  which  it  | 

f 

can  be  made  applicable,  for  the  city  can  exercise  no  jurisdiction 
outside  its  boundaries.  How8,days , through  the  construction  of  tel- 
ephone and  telegraph  lines,  railroads,  and  transmission  circuits, 
there  are  numerous  cases  in  which  a utility  may  operate  in  num^arous 
municipB-lities,  For  example,  the  Public  Service  Company  of  North- 
ern Illinois  supplies  electric  service  in  more  than  150  comiuunities 
in  the  northern  part  of  that  stave,  while  the  Western  United  Gas 
Compa.ny  furnishes  gas  services  in  about  65  cities  and  villp,ges  in 
the  vicinity  of  Aurora,  Illinois.  If  each  of  these  communities  at- 
tempted to  fix  the  prices  for  which  those  services  should  be  sold, 
it  is  manifest  there  would  be  a great  variety  of  ideas  on  the  sub- 
ject, and  it  well  might  happen  that  persons  living  on  opposite  sides 
of  the  line  separating  vwo  adjoining  municipalities  would  be  receivJ 
ing  the  same  service  at  different  rates,  clearly  an  unjust  and  dis- 
criminatory condition  of  affairs. 

Consider  also  the  case  of  a street  railway  company  such  as  the 
Chicago  & West  Towns  Railv;ay  Company  which  serves  11  cities  and 
villages  closely  adjacent  to  each  other  and  to  the  ?/est  boundary  of 
Chicago.  It  is  not  conceivable  that  there  could  be  such  unificar- 
tion  of  ideas  among  the  eleven  that  a just  and  proper  fare  could  be 
placed  in  effect,  or  that  any  one  of  therii  could,  of  Itself,  perform 


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16 


the  work.  As  another  example  of  this  weakness  in  municipal  regu- 
lation the  writer  calls  to  mind  a small  street  railway  system  in 
southern  Ohio  which  traverses  two  municipalities,  one  about  seven 
times  the  size  of  the  other.  In  that  state  the  Public  utilities 
Commission  has  no  direct  control  over  the  rates  charged  by  street 
railway  companies,  and  it  caiTie  about  that  the  management  of  the 
company  secured  the  consent  of  the  larger  community  to  an  increase 
in  fares.  Ho?/ever,  the  increase,  justly  deserved  by  the  company, 
was  blocked  by  the  refusal  of  the  smaller  community  to  approve  the 
higher  fares.  This  certainly  constituted  a case  of  the  tail  wag- 
ging the  dog,  and,  in  effect,  presented  the  spectacle  of  seven 
persons  being  governed  or  coerced  by  one,  for  that  was  the  relative 
popula-tions  of  the  two  places. 

Regule.tion  bv  State  Authority;  To  overcome  the  defects  in- 
herent in  municipal  regulation,  ajid  to  insure  a uniformity  of  prac-' 
tice  not  otherwise  obtainable,  most  of  the  states  have  enacted  laws 
providing  for  state  coirunissions  having  jurisdiction  over  the  rates, 
services,  and  practices  of  public  utility  corporations.  Herein- 
after there  is  presented  a table  showing  certain  facts  about  these 
commissions.  Prorn  this  table  it  will  be  seen  that  the  first  state 
comuTiission  was  organized  about  two  years  after  the  close  of  the 
Civil  ?/ar.  Most  of  the  early  commissions  had  powers  solely  relat- 
ing to  steam  railroads,  but,  as  the  idea  spread,  the  jurisdictions 
were  increased  until,  at  the  present  time,  many  of  the  state  com- 


1? 


miBBione  have  exceedingly  hroad  powers  over  the  corporations  furn- 
ishing public  utility  services. 

The  creation  of  such  coiardssions  certainly  forms  a progress- 
ive step,  inasmuch  as  the  control  of  rates  and  services  passes  in- 
to the  hands  of  an  organization  of  sufficient  magnitude  to  enable  j 
it  to  make  a special  study  of  the  va-ried  problems  presented.  These  j 

I 

q.uestions  thus  finally  come  to  be  handled  by  persons  well  q.ualified| 
for  the  task,  and  also  largely  beyond  the  malignant  influence  of 
petty  politics.  While  it  is  true  that  some  sts.te  commissions  oc- 
casionally so  far  forget  themselves  as  to  stoop  to  political  rate 
miaking,  nevertheless  I ani  of  the  opinion  such  cases  form  the  ex- 
ception and  do  not  detract  from  the  value  of  the  general  principle 
of  regulation  by  staue  authority.  It  is  obvious  that  the  cure  for 
this  type  of  commission  is  q.uite  simple,  and  the  remedy  consists 
in  electing  the  chief  executive  Uf  the  appointing  power  be  in  him) 
frorii  a class  of  men  who  will  not  stoop  to  the  criminal  folly  of 
appointing  upon  such  oommlssions  men  other  than  those  who  fearless- 
ly will  decide  cases  upon  their  merits  regardless  of  the  political 
exigencies  of  the  time, 

I am  of  the  opinion  that  the  general  results  secured  through 
state  regulation  are  fairly  satisfactory.  As  many  of  the  present 
disputed  q.uestions  of  principle  become  better  settled  it  is  cer- 
tain their  usefulness  will  increase,  and  the  science  of  rate  mak- 
ing will  become  more  standardized  than  it  now  is,  A great  step  in 
advance  will  be  taken  when  laws  will  be  enacted  that  req.uire  per- 


18 

sons  serving  as  meralDers  of  such  ooBinilssions  to  q.ualify  for  their  po- 
sitions through  some  form  of  examination  that  will  demonstrate  their 
special  fitness  for  the  work.  The  farther  such  commiesions  are  re- 
moved from  politics  the  better  it  will  he  for  the  members  themselves 
the  corporations  over  which  they  have  jurisdiction,  and  for  the  pub- 
lic. There  is  no  phase  of  economic  life  in  the  united  States  that 
is  so  wasteful  as  politics,  or  any  agency  that  has  as  great  a per- 
centage of  loss  between  input  and  output.  There  should  be  no  "un- 
derground connection"  between  such  comiriissions  and  political  lead- 
ers. I do  not  have  any  fear  of  corruption  of  the  membership  by  the 
so-ce-lled  "interests".  The  la,ck  of  efficiency  in  such  organizations 
is  almost  invariably  due  to  the  meddling  of  political  lea,ders, 

Eegulation  by  federal  Authority:  Principally  to  enable  due 

provisions  to  be  made  for  the  regulation  of  interstate  traffic  on 
common  carriers  (these  powers  being  beyond  the  authority  of  the 
states)  the  Congress  created  the  Interstate  Commerce  Commission  in 
1887.  At  first  the  organization  was  weak  in  many  ways,  possessed 
but  little  authority,  and  did  not  exercise  that  to  its  full  extent. 
But  of  late  years  the  Commission  has  grown  in  magnitude  and  juris- 
diction until  it  now  overshadows  anything  of  the  kind  in  the  United 
States,  possessing,  as  it  does,  powers  that  are  almost  plenipotent- 
iary. Congress  and  the  courts  have  stretched  the  meaning  of  what 
comprises  interstate  traffic  until  now  it  includes  practically  all 
transportation  for  profit  or  pleasure.  However,  to  the  credit  of 


rn 


the  Interstate  Corriinerce  ComirdsBion,  it  may  he  said  that  in  the  main 
its  powers  have  been  exercised  with  circumspection  and  that  the 
work  done  hy  it  is  praiseworthy*  its  control  over  rates  and  ser- 
vices furnished  hy  interstate  carriers  now  is  practically  absolute, 
the  Esch-Cummins  Transportation  Act  having  removed  practically  the 
last  vestige  of  authority  from  the  state  commissions  insofar  as 
the  railroads  are  concerned. 


PUBLIC  UTILITY  RATE  MKIIG 

Underlying  Princinles;  The  general  theory  underlying  the 
regulation  of  the  rates  charged  hy  a corporation  furnishing  util- 
ity services  is  the  protection  of  the  public  against  unreasonable 
oha.rges,  secure  freedom  from  discriminatory  practices,  and  to  in- 
sure a uniforiTiity  of  fair  dealing  that  was  not  had  under  the  form- 
er competitive  sysuem.  It  has  been  found  by  sad  and  costly  exper- 
ience that  competition  in  public  utility  services  is  unprofitable 
to  the  public  and  disastrous  to  the  corporations  which  engage  in 
it.  The  writer  has  in  mind  a small  city  in  v/estern  Illinois  that 
at  one  time  had  two  gas  companies,  although  the  population  20  years 
later  was  only  3,500,  a cotimunity  too  small  to  support  even  one 
concern  of  that  kind.  The  result  of  such  competition  was  financial 
disaster  for  both  companies,  although  they  managed  to  exist  in  a 


20 

state  of  semi-starvation  until  alDsorlDed  "by  a large  oompany  having  1 
a centralized  management  and  affording  inter-community  service 
through  one  controlling  organization.  Even  under  the  more  favor- 
able circumstances  thus  surrounding  the  operation  of  the  plant  it  | 
could  scarcely  exist.  In  such  a case  the  functions  of  a regula- 

1 

tory  commission  could  have  been  exercised  with  profit  to  the  public j 
for  had  such  a commission  been  in  existence  it  would  have  been  dif- 
ficult, if  not  impossible,  for  a second  company  to  have  secured  the 
necessary  permission  to  operate  in  the  town.  Hence  the  public 
would  have  been  better  served  by  the  one  oompany,  and  the  stock- 
holders of  the  second  oompany  would  have  been  saved  from  loss  thus 
occasioned  by  wasteful  competition. 

But  the  public  is  not  the  one  which  needs  all  the  protection 
in  the  dual  relation  of  corporation  and  public.  Eor  it  frequently 
happens  that  the  corporation  would  become  the  prey  of  conscience- 
less politicians  were  it  not  for  the  protection  afforded  by  the 
wise  provisions  of  a public  utilities  law  administered  by  a fear- 
less and  upright  commission.  Should  the  commission  prove  recreant 
to  its  duty,  then  the  corpora.tion  has  its  redress  in  the  courts. 
However,  it  is  plain  that  the  controlling  principle  of  rate  regu- 
lation by  public  authority  is  the  protection  of  the  public  against 

rapacity  on  the  part  of  the  corporation,  and  to  stand  as  a barrier 

* 

between  the  latter  and  the  selfish  schemings  of  political  grafters. 
Protecting  the  corporation  against  the  oppressions  of  politicians 
is  but  another  form  of  defending  the  public  against  itself,  for, 


81 

were  it  not  for  fa,lthless  putlic  servants  there  would  he  little 
need  for  such  protection. 

Pate  Making  hy  Municinal  Authorities;  Regulation  hy  munici-  j 
pal  authorities  is  about  the  oldest  form  of  governmental  control.  j 

I 

This  arises  principally  from  the  fact  that  about  the  oldest  public  | 
utilities  were  gas  and  water  companies,  both  of  which  have  more  I 
than  a century  of  history.  Naturally  these  companies  operated  in 
the  beginning  well  within  the  limits  of  incorporated  places,  and 
q.uite  as  naturally  it  was  seen  that  it  would  be  of  advantage  to  the 
citizens  if  the  compa,nies  were  permitted  to  make  use  of  the  streets 
in  order  to  lay  their  mains.  As  a matter  of  fact,  there  was  little 
alterne^tive,  as  it  readily  is  seen  that  it  would  have  been  a prac- 
tical impossibility  to  have  constructed  the  distribution  on  priv- 
ate property.  Quite  properly  the  municipality  retained  control  of 
the  streets,  and  also  thriftily  drove  the  best  bargain  it  could  in 
the  way  of  low  rates  or  payments  for  the  use  of  the  public  proper- 
ty. 

The  plan  worked  q.uite  well  at  the  beginning,  as  the  enterpriset 
were  new,  and  it  could  not  be  foretold  just  what  the  results  would 
be  in  a financial  way.  In  many  cases  the  oompa.nies  were  prosperous 
from  the  outset,  some  of  them  unduly  so,  and  this  circumstance  a- 
roused  the  envy  of  those  companies  who  were  less  fortunate,  or  the 
cupidity  of  the  greedy.  In  the  end  either  one  or  the  other,  or  oc- 
casionally both,  proved  the  destruction  of  the  unfortunate  company. 
The  envy  of  competitors  produced  rate  fights  which  were  as  disas- 
trous to  the  instigators  as  to  the  defendant,  and  the  greed  aroused 


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32 

in  the  politicians  was  foolishly  sought  to  he  satisfied  hy  recourse 
to  bribery,  the  payment  of  protection  money,  or  other  device  of 
shady  character.  The  general  result  v/as  chaos  and  financial  dis- 
aster to  many  companies  which  otherwise  might  have  been  fairly  suc- 
cessful. In  the  end  these  conditions  have  reacted  unfavorably  upon 
the  class  of  men  who  were  responsible  for  them,  for  it  has  come  gu- 
bout  that  relief  has  been  q.uite  generally  sought  by  taking  away 
from  municipal  authorities  the  powers  which  they  showed  so  little 
capacity  to  intelligently  exercise. 

As  previously  stated,  the  authority  of  a city  council  is  con- 
fined to  the  territory  within  the  corporate  limits  of  the  municipal- 
ity. It  now  has  come  about  that  many  street  railway  companies,  gas 
companies,  electric  companies,  and  telephone,  telegraph,  or  other 
companies  transact  their  affairs  and  furnish  services  far  outside 
the  limitsof  any  one  city  or  village,  and  it  is  readily  seen  that 
the  scope  of  authority  possessed  by  the  city  or  village  council  is 
utterly  inadeq.uate  to  cope  with  such  situations.  Hence  recourse 
must  be  taken  to  authority  of  greater  extent,  and  this  must,  per- 
force, lie  in  the  state.  Under  such  circumstances  the  loudly  prp- 
claimed  principle  of  home  rule  must  step  aside  for  regulation  or 
authority  that  is  more  effective.  And  this  is  exactly  the  thing 
that  has  taken  place,  for  there  has  been  but  an  exceedingly  limited 
return  to  the  older  form  when  once  the  newer  has  been  tried, 

Regulation  by  Sta,te  Authority:  With  the  expansion  of  utili- 

ty enterprises,  particularly  the  railroads,  it  early  was  seen  that 
control  by  municipal  authority  was  impracticable,  and  there  arose 


23 

a demand  for  more  effective  supervision.  This  was  met  in  the  early 
days  following  the  close  of  the  Civil  War  hy  the  creation  of  one  or 
two  state  commissions,  whose  poviers  were  practically  confined  to 
questions  affecting  steam  railroads.  Among  the  first,  if  not  the  j 

first,  to  recognize  the  developing  principle  of  state  regulation  1 

was  the  commonwealth  of  Ohio,  which  on  April  5,  1867,  enacted  a law 
for  the  supervision  of  railways  and  telepgraphs.  The  enforcement 
of  the  provisions  of  the  act  was  placed  in  the  hands  of  the  commis- 
sioner of  railroads  and  telegraphs.  A somewhat  similar  law  was 
passed  hy  the  state  of  Massachusetts  in  1869. 

At  first  the  idea  was  received  with  disfavor  or  with  hitter 
animosity,  and  was  denounced  as  socialistic,  burdensome,  tyranni- 
cal, or  hy  other  opprohious  terms.  But  the  seed  thus  sown  has 
grown  hardier  with  the  passing  years,  and  the  authority  of  state 
commissions,  extended  and  enlarged,  has  now  come  to  supersede  that 
of  municipalities  in  practically  all  the  states  of  the  Union  with 
unimportant  exceptions.  While  the  powers  of  these  commission  vary 
widely,  as  di  own  hy  the  table  hereinafter  presented,  nevertheless 
they  recognize  the  fundamental  principle  of  para^iount  authority 
being  vested  in  the  state,  and  it  is  well  within  the  hounds  of 
probability  that,  as  the  principles  of  rate  making  become  more  set- 
tled, the  authority  of  the  weaker  commissions  will  become  much  more 
extended  and  of  greater  benefits  to  the  citizens  of  the  commonwealth 
A glance  at  the  table  will  show  that  the  weaker  commissions  are 
generally  confined  to  the  more  backward  states  as  regards  economic 
progress . 


24 

Organization  of  State  Regulatory  CommisaionB ; Generally 
speaking,  state  regulatory  coMiiissions  are  composed  of  from  three 
to  seven  memhers,  commonly  appointed  by  the  governor  of  the  state, 
although  some  are  elective,  usually  no  specific  q.ualif ioations 
for  the  position  are  required  by  statute,  the  legislatures  evident- 
ly preferring  to  rely  upon  the  good  sense  and  discretion  of  the 
chief  executive.  Where  the  people  choose  a high  class  executive 
for  governor,  the  plan  of  appointing  the  commissioners  by  that  of- 
ficial appears  to  work  out  reasonably  well.  On  the  other  hand, 
where  a weak  or  incompetent  executive  is  chosen  his  unfitness  is 
practically  certain  to  be  reflected  in  the  appointments  made  by 
him,  and  this  applies  with  particular  force  to  members  of  the  com- 
mission, These  men  stand  in  the  same  relation  to  the  public  as  do 
the  courts,  and  they  should  be  equally  above  suspicion  as  to  charac- 
ter or  competency. 

Requirements  for  Membershin:  As  abve  stated,  there  cormnonly 

are  no  specific  req.uieements  provided  by  statute  for  membership 
on  the  state  commission.  It  must  be  generally  admitted  that  no  po- 
sition in  the  state  calls  for  a higher  type  of  man  than  does  that 
of  commissioner,  and  every  effort  should  be  made  to  see  that  only 
persons  of  the  best  character  and  attainments  should  so  serve.  In 
my  opinion,  the  personnel  of  state  commissions  would  generally  be 
materially  improved  by  requiring  members  to  pass  a rigid  test  be- 
fore an  impartial  tribunal  as  to  their  qualifications  for  the  place 
Quite  generally  the  minor  positions  are  filled  from  civil  service 
lists,  and  this  is  a material  aid  in  holding  back  the  aggressions 


85 


of  politicians  seeking  positions  for  friends  regardless  of  the  fit- 
ness of  the  applicant.  If  this  plan  were  adopted  there  would  he 
incentive  for  high-class  men  to  seek  the  positions,  and  men  of  low 
caliber,  who  are  sometimes  appointed  on  such  commissions  hy  govern- 
ors seeking  to  repay  political  obligations,  would  have  no  chance 
of  obtaining  the  places. 

Further,  if  membership  on  the  commissions  were  made  the  result 
of  special  fitness  therefor,  there  would  be  but  little  weight  to 
the  oo'mmon  charge  that  a commission  is  playing  politics  in  handing 
down  this  or  that  decision.  If  the  members  of  the  commission  did 
not  ovfe  their  positions  to  politics  they  would  have  little  or  no 
reason  to  play  politics  in  rendering  their  decisions,  if  the  com- 
mission is  composed  of  high-class  men  it  will  give  a good  account 
of  itself,  and  will  deserve  and  have  the  confidence  of  the  elect- 
orate, The  salaries  paid  members  are  usually  sufficient  to  attract 
men  of  ability,  and  if  they  are  assured  there  is  a proper  future 
in  the  work  there  will  be  no  dearth  of  suitable  material.  Under 
present  conditions,  when  it  is  practically  certain  an  appointee 
must  relinq.uish  his  position  after  the  next  gubernatorial  election, 
there  can  be  no  great  incentive  for  capable  men  to  accept  the  po- 
sition. 

Also,  there  is  no  doubt  in  my  mind  that  the  engineering  pro- 
fession should  be  well  represented  upon  the  memberships  of  commis- 
sions. Practically  eighty-five  per  cent  of  the  questions  which  a 
commission  must  decide  involve  engineering  problems,  nevertheless 


36 

the  profession  is  represented  hut  sparingly  on  state  commissions. 

To  me  it  appears  this  situation  is  one  calling  for  the  attention 
of  the  national  societies  to  the  end  that  the  claims  of  tne  profes- 
sion in  this  direction  may  he  more  fully  considered. 

The  costliness  of  having  unfit  men  direct  public  affairs  is 
strikingly  illustrated  in  the  present  railroad  situation.  Here  we 
have  tne  spectacle  of  men  laying  down  laws  and  rules  for  the  con- 
duct of  the  greatest  industry  in  the  United  States,  yet  prohahly 
not  one  of  them  ever  had  any  more  experience  with  a railroad  than 
consists  in  riding  over  them  on  a pass.  If  voters  were  as  insist- 
ent on  q.ualif ications  in  public  officials  as  they  are  for  fitness 
in  their  private  businesses,  the  change  for  the  better  in  this 
country  would  be  miraculous.  Certainly  the  public  pays  dearly  for 
its  carelessness  in  this  respect,  but  there  appears  little  relief 
until  such  time  as  the  present  mounting  cost  of  government  reaches 
a height  sufficient  to  cause  considerable  thinking  on  the  part  of 
those  who  pay  the  taxes. 

Regulation  by  Federal  Authority;  following  the  lines  first 
laid  down  by  some  of  the  states,  and  after  prolonged  consideration 
of  the  matter,  the  Congress  created  the  interstate  Commerce  Commis- 
sion in  1887.  At  first  its  powers  were  small  and  were  hesitating- 
ly used.  But  the  general  effect  and  work  of  the  commission  were 
good,  its  results  were  helpful,  and  from  time  to  time  its  powers 
have  been  amplified  until  now  they  are  almost  czar-like  over  the 
rates  and  services  furnished  by  the  common  carriers  throughout  the 


27 


United  States.  The  commission  now  consists  of  nine  memhers,  each 
appointed  hy  the  President  for  six  years,  and  they  are  amply  furn- 
ished with  competent  clerical  and  technical  forces  to  supply  the 
need  for  trained  assistants  in  carrying  out  the  intricate  worh  of 
the  organization.  Almost  complete  supervision  is  maintained  over 
the  activities  of  the  cor.mion  carriers,  and  I am  of  the  opinion  it 
can  he  truthfully  said  that  in  the  main  the  work  of  the  commission 
is  capable  and  to  he  highly  commended.  However,  of  one  thing  I am 
convinced,  and  that  is  that  the  commission  should  have  one  or  more 
trained  engineers  on  its  memhership,  for  a large  part  of  the  prob- 
lems involve  engineering  q.uestions,  just  as  do  similar  matters  be- 
fore the  state  commissions. 

Without  doubt  the  most  extensive  valuation  program  ever  under- 
taken is  now  approaching  completion  by  the  Interstate  Coiranerce  Com- 
mission. 1 refer  to  the  appraisal  of  the  properties  of  the  common 
carriers,  begun  by  the  Division  of  Valuation  of  the  Commission  in 
1914,  and  carried  forward  continuously  since  that  time.  All  of  the 
property  of  each  carrier  was  inventoried  in  the  field  by  government 
forces,  and  to  the  q.uantities  thus  secured  there  have  been  applied 
prices  representing  approximately  the  cost  of  reproducing  the  prop- 
erty at  the  time  of  the  valuation,  commonly  the  30th  of  June  of  one 
of  the  years  subseq.uent  to  1913.  In  this  work  the  Commission  was 
ably  assisted  by  the  carriers  themselves,  who  maintained  extensive 
valuation  departments,  and  assisted  each  other  in  presenting  the 
various  phases  of  the  q.uestions  involved.  Able  and  voluminous 
briefs  have  been  presented  before  the  Commission  by  the  railroads 


88 


organized  into  the  Presidents'  Conference  Committee,  and  these  ar- 
.guments  have  dealt  in  an  exhaustive  way  with  the  contentions  of  the 
carriers,  as  seen  through  their  eyes,  likewise,  the  state  commis- 
sions, through  their  national  organization,  have  presented  ma,ny 
able  "briefs  and  arguments  in  opposition  to  the  claims  of  the  car- 
riers, or  upon  the  questions  raised  "by  the  procedure  of  the  Commis- 
sion. 

Prom  the  appraisals  thus  prepared  "by  the  commission,  tentative 
valuations  of  certain  properties  have  "been  made  "by  it.  Already 
have  some  of  the  rulings  and  decisions  of  the  commission  concern- 
ing valuation  q.uestions  found  their  way  into  the  courts  in  an  ef- 
fort to  clarify  the  present  situation  with  respect  to  some  of  the 
vexatious  (questions  involved  or  the  prihciples  at  stake.  From  out 
the  mass  of  conflicting  opinions  thus  presented  there  doubtless 
will  coiTie  from  the  courts  decisions  which  will  set  at  rest  many  of 
the  controversies  that  have  raged  since  the  beginning  of  public  u- 
tility  valuations.  If  it  shall  come  about  that  the  Supreme  Court 
of  the  United  States  decides  certain  of  the  fundamental  issues  in- 
volved, there  can  be  no  doubt  that  the  whole  atitosphere  surround- 
ing such  appraisals  will  be  cleared,  and  there  will  not  exist  the 
present  confusion  and  uncertainty  of  procedure  respecting  numerous 
phases  of  valuation  matters. 


29 


VALUE 


General : In  the  hroadest  sense,  value  may  he  defined  as  the 

worth  of  an  object*  While  this  worth  commonly  is  measured  in  mon- 
ey, nevertheless  such  measure  is  not  an  essential,  as  an  object  of 
worth  freq.uently  is  exchanged  for  another  article  of  the  same  or 
different  value.  It  is  plain,  then,  that  in  such  a transaction, 
money  has  not  been  used,  even  indirectly,  as  the  yardstick  with 
which  to  measure  the  relative  values.  However,  for  the  more  re- 
stricted purposes  of  this  article,  worth  may  be  defined  as  the  rel- 
ative money  value  of  an  article  or  combination  of  articles  into  a 
property. 

Value  for  Various  Purposes ; It  is  a matter  of  common  knowl- 
edge that  the  same  article  may  have  differing  values,  depending 
upon  the  uses  to  which  it  can  be  put,  the  desire  of  some  one  for 
its  possession,  the  amount  which  it  can  earn,  or  some  other  cause. 
Freq.uently  sentiment  may  play  a considerable  part  in  fixing  the 
worth  of  an  article.  Thus,  a tract  of  land  which  forms  the  home- 
stead of  an  aged  couple  may  have  a much  greater  value  in  the  eyes 
of  the  owners  than  it  would  if  it  were  owned  by  recent  comers,  for 
to  the  former  the  associations  connected  with  the  place  comprise 
a value  that  is  practically  lacking  in  the  latter  case.  A painting 
may  be  priceless  to  the  owner  because  it  was  done  by  one  holding 
a high  place  in  his  affections,  although  the  work  itself  is  wholly 
mediocre. 


30 


Location  also  plays  an  important  part  in  determining  the  value 
of  an  article.  Thus,  a dwelling  may  he  placed  in  different  neigh- 
borhoods and  its  value  will  rise  or  fall  in  proportion  to  the  desir- 
ability of  the  neighboring  structures,  A store  may  be  a great  suc- 
cess; if  placed  in  a particular  location  and  an  absolute  failure  if 
operated  in  a locality  unsuited  to  its  req.uirements . Niagara 
Tails  would  have  little  or  no  commercial  or  scenic  value  if  placed 
in  the  heart  of  Africa.  Similar  examples  might  be  given  almost 
indefinitely,  but  the  above  will  suffice  for  our  purpose. 

Just  as  any  other  article  or  property  has  differing  values  at 
different  times  or  locations,  or  for  different  purposes,  so  does  a 
public  utility  property  have  various  values,  depending  upon  the 
purpose  for  which  the  value  is  sought.  Thus,  the  property  may  have 
a value  for  purchase  or  sale;  it  may  have  another  for  taxation;  and 
it  may  have  a rate  making  value.  Each  of  these  may  be,  and  probab- 
ly is,  different  from  either  of  the  others.  Thus,  the  property  may 
be  what  is  commonly  termed  a money  maker,  that  is,  one  that  has  a 
high  earning  capacity.  This  attribute  will  make  it  attractive  to  a 
possible  purchaser  , for  he  can  buy  it  with  the  reasonable  assur- 
ance that  his  money  is  safe  and  willreturn  him  a fair  rate  of  in- 
terest upon  his  investment.  Or  it  may  be  that  he  is  of  the  opin- 
ion that  if  certain  changes  in  operating  methods  shall  be  put  into 
effect  that  the  present  earning  capacity  may  be  considerably  in- 
creased and  therefore  his  earnings  be  proportionately  enhanced.  In 
such  cases  it  is  q.uite  clear  the  property  will  have  a rather  high 


31 

market  value,  or,  which  is  the  same  thing,  a superior  worth  for 
purposes  of  purchase  or  sale. 

On  the  other  hand,  the  property  may  have  small  earning  power, 
arising  from  a number  of  causes;  it  may  he  in  a decrepit  condition 
and  incapable  of  rehabilitation  except  at  prohibitive  expense,  or 
there  may  be  other  reasons  why  the  property  is  undesirable  from  the 
point  of  view  of  the  investor,  in  such  cases  it  is  evident  the 
property  would  have  a low  value  in  the  eyes  of  a prospective  pur- 
chaser.  Further,  because  of  the  varying  judgments  of  individuals, 
the  property  might  have  as  many  values  as  there  might  be  persons 
to  whom  it  was  offered  for  sale.  Hence,  the  market  value  of  the 
property  appears  an  extremely  variable  quantity,  although  the  dif- 
ferences may  fall  within  rather  narrow  limits. 

OondeTonation  Value;  Some  classes  of  property,  particularly 
Itind,  may  have  a so-called  condemnation  value,  which,  in  a sense, 
is  closely  akin  to  market  value.  For  example,  a railroad  company 
oo'/omonly  has  the  power  of  eminent  domain,  that  is,  it  may  take  pos- 
session of  real  estate  upon  payment  of  such  sum  therefor  as  may  be 
fixed  through  court  procedure,  and  this  power  is  freq,uently  made 
use  of  where  the  owner  will  not  sell.  The  condemnation  value  of 
land  is  usually  more  than  the  average  market  worth  of  similar 
lands  in  the  vicinity.  This  is  so  for  a number  of  reasons,  chief 
Eimong  which  is  the  prevalent  prejudice  against  railroad  companies. 
It  is  easy  for  a skillful  lawyer  to  arouse  this  prejudice  in  the 
minds  of  a jury,  or  to  play  upon  their  sympathies  in  such  manner 
that  his  client  will  secure  a sum  for  his  property  that  is  consid- 


erably  in  excess  of  its  true  worth  as  measured  hy  other  lands  in 

the  vicinity.  In  fact,  the  common  estimate  of  railroads  is  that  || 

[| 

land  acq.uired  through  condemnation  proceedings  costs,  on  the  aver-  | 

i 

i 

age,  about  two  and  one-third  times  as  much  as  its  true  value  as  | 

j 

measured  by  that  of  similar  lands*  With  other  classes  of  public  j 
utility  properties  this  value  is  not  so  much  in  evidence,  as  they  | 
usually  do  not  possess  the  power  of  eminent  domain,  although,  in  | 

certain  cases,  it  may  be  given  them  in  Illinois  by  the  action  of 

the  state  commission  exercising  regulatory  powers,  at  present  call- 
ed the  Illinois  Oorrmierce  Commission.  However,  the  condemnation  val- 
ue is  an  element  of  cost  in  many  cases,  and  therefore  is  one  with 
which  we  have  to  reckon. 

Taxable  Value;  The  value  of  a property  for  purposes  of  tax- 

ation may  be  entirely  differenx  from  that  for  other  purposes.  let 
it  is  a common  experience  to  have  attorneys  attack  a valuation  of 
a public  utility  property  that  was  made  for  rate  purposes  because 
it  is  higher  than  the  value  upon  which  the  oo  mpany  has  paid  taxes 
in  the  past.  It  is  a matter  of  common  knowledge  that  but  little  | 
property  is  valued  at  its  full  worth  for  taxation  purposes.  The 
attorney  who  attacks  the  value  of  a property,  made  for  rate  pur- 
poses, commonly  forgets  that  the  house  he  occupies  is  taxed  upon  a 
value  far  less  than  the  sum  for  which  he  could  sell  it  in  the  open 
market.  Farm  lands  notoriously  are  taxed  upon  values  far  less  than 
they  could  be  sold  for,  and  the  same  thing  is  true  of  most  a,rticles 
of  personal  property.  In  my  opinion  there  can  be  no  particular 


34' 


special  values  do  not  attach  to  the  value  of  a public  utility  prop- 
'erty  where  that  value  is  determined  for  rate  making  purposes.  Thus 
a water  company  would  not  he  permitted  to  capita,lize  against  its 
consumers  any  excessive  value  hy  reason  of  the  fact  that  it  owned 
the  only  available  source  of  water  supply  in  the  community.  This 
is  especially  true  in  those  cases  wherein  the  special  value  claim- 
ed represented  no  investment  or  sacrifice  on  the  part  of  the  comp- 
any, In  general,  public  utility  properties  may  not  capitalize  the 
necessities  forced  upon  a community  because  of  natural  conditions 
which  tend  to  insure  a monopoly  or  which  accrue  to  the  property 
without  expense  to  the  owners  or  other  sacrifices  upon  their  part. 
Rate  Making  Value;  We  come  now  to  that  value  of  princips,! 
consideration  in  this  article,  that  is,  the  rave  making  value  of  a 
public  utility  property.  Briefly,  this  is  the  sum  upon  which  com- 
petent authority  fixes  as  the  amount  upon  which  the  owners  of  the 
enterprise  are  entitled  to  a reasonable  return  from  its  consumers 
in  the  way  of  rates  for  the  services  it  furnishes,  provided  always, 
these  rates  are  Just  and  fair.  While  it  is  a comparatively  simple 
matter  to  define  this  vaJue,  nevertheless  its  asoertainn:ent  is  one 
of  the  most  complex  probleiriS  with  v^hich  we  have  to  deal  in  rate 
cases,  and  while  there  appear  signs  of  progress  in  settling  some  of 
the  debated  questions  there  still  is  much  to  be  done  before  their 
staxus  is  exactly  dexermined.  It  is  in  the  effort  to  somewhat  clar-’ 
ify  the  situation  that  the  present  discussion  has  been  prepared,  and 
in  the  final  pages  thereof  argument  is  made  for  a procedure  that 


35 

will  greatly  simplify  the  q.uestion  and  render  possible  the  settle- 
ment of  many  of  the  complex  prohleae  now  confronting  appraisers 
and  regulpvtory  authorities. 

Assert p,inirient  of  Kate  Making  Value;  In  suhseq.uent  pages  j 
there  will  he  discussed  certain  elements  of  value  in  the  property  | 

j 

of  a public  utility  enterprise.  As  previously  sta.ted,  practical- 

I 

ly  all  the  states  now  have  a regulatory  commission  in  which  powers 
are  vested  to  fix  the  rates  that  may  be  charged  for  the  services 
furnished  by  public  utility  c.orporauions . As  shown  hereinafter, 
these  commissions  have  extremely  varied  opinions  concerning  the 
proper  basis  for  determining  rate  making  value,  and  so  pronounced 
is  the  disagreement  that  discord  probably  forms  a better  term  for 
describing  the  existing  situation.  Some  of  this  is  due  to  a lack 
of  understanding  of  valuation  q,uestions  by  political  commissioners 
who  represent  little  more  than  the  potential  ability  to  control  a 
portion  of  the  vote  at  a forthcoifdng  election,  while  a consider- 
able portion  has  been  injected  by  the  efforxs  of  engineers  and  u- 
tilities  to  get  as  high  a value  as  possible  in  a particular  case, 
forgetting  that  many  times  the  value  of  a property  is  secondary  in 
the  determination  of  rates.  Then,  too,  not  a little  of  the  diffi- 
culty is  due  to  the  courts,  which,  in  the  manner  customary  to  them, 
have  failed  to  lay  down  rules  of  specific  application.  This  arises 
from  the  fact  that  too  frequently  Judicial  decisions  deal  in  gener- 
alities, and  these  generalities  are  taken  too  seriously  or  too  nar- 
rowly by  others  who  seek  to  interpret  them.  While  I am  far  from 
criticising  the  courts,  nevertheless  I trust  that  the  time  is  com- 


36 


ing  when  our  oourte  of  last  resort  shall  lay  down  some  definite 
rules  for  guidance  in  valuing  properties,  for,  in  the  finaly  analy- 
sis, it  is  they  who  control  the  situation.  As  these  matters  become 
better  understood  I am  sure  that  court  decisions  will  reflect  the  j 

progress  made  toward  final  disposition  of  the  many  questions  w^ich  | 

I 

now  arise.  Inasmuch  as  it  is  the  courts  of  highest  jurisdiction  ' 
to  which  we  must  look  for  final  disposition  of  the  q.uestions,  we 
logically  may  inq.uire  as  to  just  what  has  been  done  by  them. 

Among  the  earliest  decisions  handed  down  by  high  courts  con- 
cerning q.uestions  of  valua,tion  is  that  by  the  United  States  Supreme 
Court  in  the  historic  and  epoch-making  Smyth  v,  Ames,  In  1893  the 
Uebraska  legislature  passed  an  act  classifying  and  prescribing  cer- 
tain maximum  rates  for  freight  within  that  state.  An  action  was 
brought  by  the  Union  Pacific,  the  Chicago  & North  Western,  and  the 
Chicago,  Burlington  & Quincy  railroads  to  enjoin  the  enforcement  of 
the  act,  principally  on  the  ground  that  it  constituted  confiscation 
of  property  in  violation  of  the  Fourteenth  amendment  to  the  Federal 
constitution.  The  matter  finally  found  its  way  into  the  Supreme 
Court  of  the  United  States,  which,  among  other  things  in  an  opinion  j 

I 

handed  down  March  7,  1898,  stated: 

”Ie  hold,  however,  that  the  basis  of  all  calculations  as  to 
the  reasonableness  of  rates  to  be  charged  by  a corporation  main- 
taining a highway  under  legislative  sanction  must  be  the  fair  val- 
ue of  the  property  being  used  by  it  for  the  convenience  of  the 
public. « 169  U.  S.  p,  466, 

In  1906  and  1907  the  legislature  of  Minnesota  enacted  two 
laws  prescribing  maximum  charges  for  freight  and  passengers,  and 
the  Railroad  and  Warehouse  Conmiission  of  that  state  issued  two 


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37 

orders  relative  thereto.  The  ITorthern  Pacific,  the  Chicago  & North 
Western,  and  the  Chicago,  Burlington  & Quincy  railroads  brought  an 
action  in  the  courts  to  restrain  the  enforcement  of  the  acts  and 
of  the  orders  of  the  Commission.  The  matter  found  its  way  to  the 
Supreme  Court  of  the  United  States,  which,  in  an  opinion  down  in 
October,  1912,  among  other  things,  stated: 

“We  concur  with  the  court  below  in  holding  that  the  value  of 
the  property  is  to  be  determined  as  at  the  time  when  the  inq.uiry 
is  made  regarding  rates.  If  the  property  which  legally  enters  in- 
to the  consideration  of  the  q.uestion  of  rates  has  increased  in 
value  since  it  was  acq.uired,  the  company  is  entitled  to  the  bene- 
fits of  such  increases.  This  is,  at  any  rate,  the  general  rule." 
(Minnesota  Rate  Cases,  230  U.  S.  352). 

The  above  excerpt  forms  a portion  of  the  famous  Minnesota 
Rate  cases  decision,  and  while  the  general  principle  thus  laid 
down  appears  explicit,  nevertheless  some  of  the  collateral  issues 
involved  have  caused  endless  speculation  as  to  just  what  the  court 
meant.  This  is  particularly  true  of  that  portion  of  the  decision 
relating  to  land  values,  for,  from  the  words  of  the  court  there 
have  been  so  many  meanings  drawn  that  it  is  evident  the  matter  was 
not  explicitly  decided. 

A recent  decision  of  the  Illinois  Supreme  Court  also  deals  at 
length  with  many  q.uestions  involved  in  fate  making  valuations.  In 
1916  the  Public  Utilities  Commission  of  Illinois  entered  an  order 
reducing  the  rates  for  gas  services  furnished  by  the  Springfield 
Gas  and  Electric  Company.  This  order  was  entered  after  exhaustive 
evidence  had  been  taken  by  the  Commission  covering  costs  of  oper- 
s.tion  and  the  value  of  the  property.  In  its  order  the  Commission 


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38 


fixed  a value  (PulDlio  Utilities  Reports,  Annotated,  1916A,  page 
281)  which  the  company  considered  unreasonably  low,  approximating 
rather  closely  the  depreciated  original  cost  of  the  property,  sjid 
the  matter  was  appealed  to  the  Sangamon  county  Circuit  court,  as 
prescribed  by  statute.  Subseg.uently  the  case  v/as  carried  to  the  ^ 

Supreme  Court  of  Illinois,  which,  in  an  opinion  handed  down  in  | 

1920,  among  other  things  stated:  \ 

"Appellee  contends  that  the  only  equitable  basis  for  determ-  [ 
ining  value  for  rate  making  purposes  is  the  cost  of  reproduction  * 
new,  less  depreciation.  This  contention  cannot  be  sustained.  The  [ 
basis  of  all  calculations  as  to  the  reasonableness  of  rates  to  be 
charged  by  a corporation  maintaining  a public  utility  under  leg-  ; 
islative  sanction  must  be  the  fair  value  of  the  property  being  [ 
used  by  it  for  the  convenience  of  the  public,  and  in  order  to  as-  ? 
certain  that  value  the  original  cost  of  construction,  the  amount  I 
expended  in  permanent  improverients,  the  present  cost  of  construe-  \ 
tion,  the  probable  earning  capacity  of  the  property  under  the  par-  I 
tioular  rates  prescribed  by  the  statute,  and  the  sum  required  to  | 
meet  operating  expenses,  are  all  matters  for  consideration,  and 

are  to  be  given  such  weight  as  may  be  Just  and  right  in  each  case."! 

! 

I: 

"It  would  be  equally  a,s  unfair  to  the  consumier  to  fix  the  j 
rate  at  a figure  which  would  produce  a reasonable  income  on  a val-  f 
ue  determined  by  the  cost  of  reproduction  new  at  a time  when  cost  | 
of  construction  was  abnormally  inflated,  as  it  would  be  unfair  to  g 
the  public  utility  to  compel  it  to  serve  the  public  for  a rate  \ 

that  would  produce  a reasonable  incoirie  on  a value  determined  by  ! 

cost  of  reproduction  new  at  a time  when  the  cost  of  construction  [ 

was  abnormally  low.  Therefore,  it  cannot  be  laid  down  as  a rule  | 

without  qualifications  that  cost  of  reproduction  new,  less  deprec-  [ 
iation,  is  the  only  basis  of  valuation  for  rate  making  purposes.  | 
It  is  equally  true  that  the  original  cost  of  construction,  less  g 
depreciation,  cannot  be  held  to  be  the  only  proper  basis  for  de-  * 

temination  of  value  for  rate  m^aking  purposes.  As  we  have' pointed  . 

out  heretofore  in  this  opinion,  the  weight  of  authority  is  that 
every  element  having  any  bearing  on  the  situation  must  be  consider- 
ed in  the  investigation  and  then  sound  business  Judgment  applied  to 
the  determination  of  a valuation  that  is  fair  and  Just  to  the  con- 
sumer and  the  utility.  Each  case  must  be  considered  on  its  own 
merits  and  such  result  of  value  arrived  at  as  may  be  Just  and  right 
in  each  case.  It  is  not  a matter  of  formulas,  but  there  must  be  a 
reasonable  Judgment  having  its  basis  in  a proper  consideration  of 
all  relevant  facts.  We  consider  any  value  a fair  value  which  fair 


39 

and  reasona”ble  men  would  say  ought  to  he  attached  to  the  property, 
under  all  the  circumstances  of  the  particular  case,  for  the  pur- 
pose of  measuring  a return  which  the  public  should  pay  to  the  own- 
er.” (Page  222). 

Insofar  as  Illinois  is  concerned,  it  is  plain  that  the  law 
as  thus  laid  down  hy  the  highest  tribunal  of  that  sta-te  must  gov- 
ern. It  will  be  observed  that  the  decision  is  largely  affirma- 
tion of  rules  previously  laid  down  by  the  United  States  Supreme, 
and  consequently  has  the  sanction  of  the  highest  judicial  author- 
ity in  the  country.  While,  for  reasons  laid  down  hereinafter,  I 
do  not  fully  agree  with  the  court  as  to  what  constitutes  fair  val- 
ue, nevertheless  I am  constrained  to  admit  that  it  is  supported  by 
the  weight  of  authority.  Particularly  do  I take  exception  to  the 
stress  laid  on  the  value  determined  as  the  result  of  the  judgments 
of  fair  and  reasonable  men.  This  same  theory  has  produced  an  a- 
mount  of  demorsJLization  in  the  determination  of  rate  making  values 
that  is  scarcely  conceivable,  for  it  frequently  has  been  used  as 
a cloak  to  mask  the  ignorance  or  incompetency  of  those  who  fix  the 
aforesaid  value.  Under  this  doctrine  a property  may  be  gifted 
with  any  number  of  ”fair  values”,  for  they  depend  upon  the  person- 
nel of  the  commission  or  other  orga.nization  which  fixes  that  val- 
ue. As  a practical  matter  a rate  m.aking  value  should  be  determin- 
ed upon  premises  that  leave  but  a small  m.argin  for  the  injection 
of  the  element  of  judgment,  for  this  factor  is  much  too  uncertain 
a quantity  and  too  liable  to  abuse  at  the  hands  of  irresponsible 
political  rate  fixers.  As  shown  hereinafter,  there  is  one  concrete 
fact  that  is  determinable  within  very  narrow  limits  for  practically 


40 


all  properties,  and  this  fact  is  the  investment  in  that  property. 
One  fact  is  always  worth  a hundred  theories,  and  far  exceeds  in 
value  the  "guesstimates"  of  men  having  little  or  no  experience  in 
the  technical  fields  of  public  utility  management.  Indeed,  it  has 
been  but  a few  weeks  since  the  worthlessness  of  such  judgments  (?) 
was  strikingly  demonstrated  in  Illinois  when  they  promptly  were 
overruled  by  the  judgment  of  the  Federal  court. 

Perhaps  the  whole  situation  may  be  summed  up  in  the  words  of 
Dr*  Thomas  Conway,  Jr.,  Professor  of  Finance,  University  of  Penn- 
sylvania, who,  in  an  article  published  in  AERA  for  January,  1923, 
at  page  486,  states: 

"The  fair  value  of  a property,  therefore,  is  a composite  re- 
sult, arrived  at  by  the  exercise  of  judgment,  taking  into  consid- 
eration the  original  cost  of  construction,  the  market  value  of  the 
stocks  and  bonds  outstanding,  and  the  cost  of  reproduction  new, 
less  accrued  depreciation,  of  the  property  in  question.  As  the 
Supreme  Court  has  said,  each  of  these  elements  is  to  be  given  such 
weight  as  is  just  and  right  in  each  case.  In  determining  the  re- 
production cost  new,  it  is  necessary  to  start  with  present  day 
prices,  deducting  therefrom  accrued  depreciation  calculated  on  the 
same  price  basis  or,  if  pre-war  prices  are  used  as  the  basis  of  the 
reproduction  estimate,  it  is  necessary  to  determine  not  only  the 
accrued  depreciation  but  also  the  appreois-tion  which  has  occurred, 
thereby,  in  effect,  arriving  at  the  same  result," 

With  the  conclusions  of  Dr.  Conway  concerning  the  present  sit- 
uation as  regpvrds  valuations  of  public  utility  properties,  I agree. 
But,  as  above  stated,  I am  far  from  accord  with  the  general  doc- 
trine that  the  element  of  "judgment"  should  play  so  prominent  a 
part  in  the  determination  of  the  value  of  a property.  This  theory 
has  been  advanced  by  commissions  almost  from  the  beginning,  in  many 
cases  to  cover  up  their  own  shortcomings  in  the  way  of  a judgment 
they  do  not  possess,  for  many  of  the  persons  endowed  by  law  with 


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41 

with  authority  to  fix  values  have  only  the  remotest  idea  of  the 
elements  of  the  subject.  They  lack  the  technical  training,  they 
lack  any  experience  in  the  particular  line  of  business  over  which 
they  are  called  to  preside,  and,  worst  of  all,  they  sometimes  lack 
backbone  to  give  a square  deal  on  the  q.uestions  that  come  before 
them.  In  such  cases  how  can  the  results  of  the  "judgment"  thus 
exercised  form  the  groundwork  of  a just  decision  in  matters  so 
important  as  the  rates  which  a public  utility  shall  charge  for  its 
services? 

There  is  a theory,  far  too  prevalent  in  this  country,  that 
election  or  appointment  to  public  office  confers,  in  some  myster- 
ious way,  an  infallibility  in  the  opinions  and  judgment  of  the 
official.  This  mischievous  and  pernicious  theory  is  largely  res- 
ponsible for  many  of  the  gross  failures  of  such  officials  - fail- 
ures which  go  unpunished  because  the  victims  are  afraid  to  complain 
or  else  because  there  is  no  adequate  check  upon  the  doings  of  those 
who  fill  the  office.  If  the  public  could  be  brought  to  exercise  a 
fraction  of  the  care  in  choosing  its  public  servants  that  it  does 
in  selecting  employes  in  private  businesses,  there  would  be  such  a 
cleaning  out  of  state  houses  and  city  halls  as  never  has  been  wit- 
nessed in  this  country.  For,  after  all,  the  administration  of  pub- 
lic office  is  nothing  more  nor  less  than  a business  proposition, 
and  the  persons  who  fill  such  offices  should  be  required  to  devote 
their  entire  time  to  the  duties  fbr  which  they  are  paid  instead  of 
building  up  a political  machine  or  giving  their  time  to  their  priv- 


If 


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I 


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42 

vate  affairs,  as  is  ooimnonly  done  in  the  United  States. 

Eleraents  of  Value : The  total  value  of  any  property  is  made 

up  of  a number  of  correlated  factors,  consisting  usually  of  the 
physical  articles  comprising  the  plant j the  costs  of  installing 
these  articles,  particularly  those  costs  which  cannot  readily  be 
allocated  to  the  article;  and  certain  other  elements  that  are 
recognized  as  existing,  but  which  cannot  be  as  readily  ascertained 
as  can  the  preceding  costs.  For  the  purposes  of  this  articles 
these  several  elements  may  be  conveniently  grouped  under  three  heads 
(1)  the  physical  elements,  comprised  in  the  articles  which  may  be 
seen,  inventoried,  or  otherwise  recognized  because  of  their  physi- 
cal attributes,  (2)  overheads,  or  costs  of  engineering,  superin- 
tendence, interest,  taxes,  injuries  and  damages,  organization,  and 
similar  expenses  during  construction  which  cannot  be  readily  al- 
located to  particular  articles  or  classes  of  property,  and  ^3)  in- 
tangibles, or  those  elements  of  value  which  commonly  are  recognized 
as  attaching  to  a property,  but  which  cannot  be  conveniently  seg- 
regated as  can  other  costs.  To  this  last-named  class  of  values  is 
commonly  given  such  names  as  going  value,  cost  of  attaching  the 
business,  or  similar  name.  Much  has  been  written  on  the  nature  of 
intangibles,  methods  of  their  ascertainment,  and  the  propriety  of 
including  them  in  rate  making  values,  but  an  extended  discussion 
of  the  question  is  beyond  the  limits  of  this  article. 

Aonraisals ; An  appraisal  of  a property  consists  of  an  ascer- 
tainment of  the  cost  of  that  property  at  some  specified  time  and 
upon  one  of  a number  of  bases  of  pricing.  It  will  be  noticed  that 


43 


I have  used  the  word  cost  instead  of  the  more  common  word  value . 
and  this  has  been  done  after  careful  consideration  of  the  matter* 

As  commonly  used,  an  appraisal  merely  lists  all  the  various  art- 
icles comprising  a property,  together  with  the  overheads  and  in- 
tangibles pertaining  thereto*  io  this  list  of  articles  are  ap- 

i 

plied  prices  that  represent  the  costs  of  such  articles  at  or  dur- 

I 

ing  a specified  time,  and  the  preparation  of  such  data  constitutes  j 
the  true  function  of  the  appraiser*  This  appraiser  cormnonly  has 
no  authority  to  determine  value  for  rate  making  or  any  other  pur- 
pose. If  the  purpose  of  the  appraisal  he  for  rate  making,  then 
the  regulatory  authority  fixes  the  value  of  the  property*  Or,  if 
the  appraisal  is  for  use  in  a purchase  or  sale  case,  the  value  of 
the  property  may  he  said  to  he  the  amount  paid  for  it,  or  for  which 
it  is  sold,  depending  upon  whether  the  viewpoint  of  the  buyer  or 
the  seller  he  taken. 

An  appraisal  of  the  property  is  a practical  necessity  in  near- 
ly every  rate  making  proceeding.  From  the  q.uoted  decisions  of  our 
courts  it  is  plain  the  company  is  entitled  to  a reasonable  rate  of 
return  upon  the  fair  value  of  its  property,  and  this  principle  pf 
rate  making  is  so  firmly  fixed  that  it  no  longer  is  open  to  aiies- 
tion.  True,  there  occasionally  may  he  a property  on  which  a comp- 
any could  not  earn  a return  upon  any  value  which  might  he  fixed 
for  the  property,  and  in  such  oases  the  preparation  of  an  apprais- 
al is  of  secondary  importance.  But  in  the  great  majority  of  such 
cases  the  company  will  protect  its  interests  by  having  prepared 


44 

a proper  appraisal  of  its  property,  and  access  to  such  will  enalDle 
the  commission  or  other  regulatory  authority  to  act  upon  the  mat- 
ter with  due  intelligence.  Many  companies  have  suffered  financial- 
ly "by  reason  of  their  failure  to  make  proper  showing  of  their  needs 
in  the  way  of  increased  rates,  and  at  the  hottom  of  the  inq.uiry 
rests  the  determination  of  the  value  of  the  property,  for  a return 
upon  this  value  forms  one  of  the  major  earnings  to  which  the  cor- 
poration is  entitled.  Hence,  in  any  well-conducted  rate  inq.uiry, 
an  appraisal  of  the  property  is  of  vital  importance. 

usually  an  appraisal  is  made  showing  the  costs  of  the  property 
at  some  specified  time,  generally  near  the  time  of  the  inq.uiry.  In 
many  oases  it  is  of  advantage  to  compile  the  appraisal  as  of  the 
"beginning  of  the  year  for  the  reason  that  this  time  coincides  with 
the  beginning  of  the  fiscal ’year  of  most  companies.  However,  the 
appraisal  may  be  made  as  of  any  definite  time,  but  it  usually  will 
be  found  of  distinct  convenience  if  it  be  made  as  of  December  31st 
of  the  year  preceding  the  inq.uiry,  and  any  additions  or  betterments 
made  to  the  property  from  that  time  to  the  beginning  of  the  inq.uiry 
shown  separately. 

Practical  Making  of  Utility  Aouralsals;  In  the  making  of  ap- 
praisals of  public  utility  properties  various  methods  are  followed 
by  appraisers,  and  the  limits  of  this  article  preclude  their  des- 
cription. However,  it  may  not  be  amiss  to  describe  a concrete  case 
in  point,  and  for  that  purpose  there  will  be  selected  the  street 
railway  property  of  The  Portsmouth  Street  Railroad  and  Light  Comp- 
any, of  Portsmouth,  Ohio.  This  company  operates  a street  railway 


45 


and  electric  power  and  lighting  business  in  Portsmouth  and  the  ad- 
joining village  of  lew  Boston,  and  an  interurhan  railway  from  New 
Boston,  Ohio,  to  Ironton,  Ohio,  a distance  of  S3  miles.  On  June 
81,  19S1,  the  city  council  of  Portsmouth  passed  an  ordinance  in 
which  it  is  sought  to  provide  street  railway  service  at  cost,  and 
on  August  85,  1981,  the  village  of  Uew  Boston  passed  a similar  ord- 
inance, These  ordinances  followed  the  lines  of  the  modern  "service 
at  cost”  franchises,  and  Section  l-o  of  the  Portsmouth  ordinance 
reads  in  part  as  follows: 

"That  after  the  effective  date  of  this  ordinance,  and  not  lat- 
er than  December  31,  1981,  The  Portsmouth  Street  Kailroad  and  Light 
Company,  at  its  own  cost  and  expense,  shall  cause  an  appraisal  to 
be  made  and  completed  of  all  its  properties  and  eq.uipment  which  are 
actually  used  and  are  necessary  in  conducting  that  portion  of  its 
street  railway  permitted  by  existing  and  effective  franchises  of 
the  city  of  Portsmouth,  Ohio,  and  the  village  of  lew  Boston,  Ohio, 
The  values  to  be  used  in  making  said  appraisal  and  the  allowances 
for  depreciation  shall  be  arrived  at  in  the  same  manner  as  such  i- 
tems  are  arrived  at  in  making  appraisals  of  properties  of  similar 
public  utilities  of  the  State  of  Ohio," 

The  appraisal  thus  required  was  prepared  under  the  supervis- 
ion of  the  writer,  and  copies  were  duly  filed  as  provided  in  the 
ordinance.  In  the  preparation  of  the  appraisal  one  of  the  first 
q.uestions  necessary  to  be  decided  was  the  basis  upon  which  it 
should  be  made,  For  this  purpose  the  Ohio  Public  utilities  Com- 
mission was  consulted,  this  body  being  considered  as  constituting 
the  highest  authority  on  the  matter  in  the  state,  under  date  of 
November  17,  1981,  Mr,  L,  G,  White,  chief  engineer  of  the  Commis- 
sion wrote  as  follows: 

"It  has  been  the  practice  of  this  Commission  since  the  rapid 
increase  in  prices  due  to  the  war  to  instruct  the  Commission's  en- 
gineers to  use  the  fair  price  obtaining  during  the  five  years  pre- 
ceding the  date  of  inventory  of  the  case  in  hand," 


« I 





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46 

The  foregoing  information  decided  the  "basis  of  the  appraisal, 
and  the  next  step  was  the  preparation  of  an  inventory  showing  all 
the  articles  belonging  to  the  street  railway  department.  As  a pre- 
liminary to  this  work,  all  the  trolley  poles  were  numbered.  Then 
a party  was  sent  into  the  field  which  carefully  measured  the  tracks 
with  a steel  tape,  at  the  same  time  making  note  of  the  location  of 
all  poles,  frogs,  switches,  paving,  and  other  fixed  physical  prop- 
erty, These  notes  were  made  in  the  same  manner  as  commonly  done 
on  chainage  surveys  of  steam  railroad  lines.  The  oars  were  inspect-- 
ed,  and  notes  made  of  their  condition,  particularly  the  bodies, 
trucks,  and  motors.  Buildings  and  their  contents  were  enumerated, 
and  finally  a mass  of  data  was  compiled  which  gave  the  q.uantities 
and  kinds  of  all  articles  comprising  the  physical  property.  These 
articles  then  were  separated  into  the  various  classes  req.uired  by 
the  uniform  System  of  Accounts  for  Electric  railways,  prescribed 
by  the  Interstp-te  Commerce  Commission,  and  officially  adopted  by 
the  Ohio  Public  Utilities  Corrimission  on  July  1,  1914, 

In  order  to  ascertain  the  conditions  of  the  rails  and  ties, 

S5  holes  were  dug  at  random  along  the  tracks,  and  careful  inspec- 
tion made  of  the  rails,  ties,  ballast,  and  paving.  Holes  were 
drilled  through  the  webs  of  rails  in  order  to  ascertain  whether 
rust  had  decreased  the  thickness,  and  the  wear  on  the  heads  of  the 
rails  due  to  the  passage  of  cars  and  vehicles  was  measuredto  the 
nearest  l/64th  of  an  inch  by  means  of  an  apparatus  designed  spec- 
ially for  the  purpose.  The  wear  of  the  trolley  wire  was  measured 
by  calipers  at  various  places . Prom  the  measurements  thus  made 


f * ' r' 

T-"*"  ' 

. ■ " j"  ^ 

’j'’  .’. 

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47 

deductions  were  drawn  concerning  the  prohahle  remaining  lives  of 
the  various  articles,  thus  comprising  a determination  of  deprec- 
iation upon  the  basis  of  inspection. 

To  the  (quantities  thus  ascertained  there  were  applied  prices  ! 
representing  the  avercvge  costs  of  the  various  articles  during  the  j 
five  years  preceding  the  time  of  valuation.  Inasmuch  as  the  ap—  I 

E 

praisal  was  miade  as  of  December  51,  1921,  this  period  comprised 
the  five  years,  1917  to  1921,  inclusive.  These  average  prices  were 
deterirdned  by  ascertaining  from  the  records  of  the  company  the  cost 
of  a given  article  in  each  of  the  five  years,  and  the  a,ritlui:etical 
average  of  these  costs  formed  the  price  applied  in  that  case.  In 
some  instances  where  the  article  was  not  purchased  in  each  of  the 
five  years,  correspondence  was  had  with  manufacturers  or  dealers 
who  customarily  supplied  the  company  with  that  class  of  eq.uipment. 
The  appraisal  included  all  property  possessed  by  the  street  rail- 
ws,y  department,  and  this  was  subdivided  into  that  actually  used  in 
I the  operation  of  the  road,  and  that  which  was  not  used  in  the  pro- 
duction of  the  service,  that  is,  into  operating  and  non-operating 
property.  The  appraisal  also  showed  the  present  or  depreciated 
cost  of  the  property,  this  being  determined  by  deducting  from  its 
cost  new  the  depreciation  which  had  accrued  to  the  time  of  valua- 
tion. 

Bases  of  AuT)r8.isals ; In  seeking  to  deterraine  the  fair  value 
of  a public  utility  property  there  have  arisen  great  differences 
of  opinion  aiuong  authorities  as  to  just  what  constitutes  the  prop- 
er bp-sis  of  ascertaining  that  air.ount.  Discussion  of  the  reasons 


for  siioh  differences  are  "beyond  the  scope  of  this  article,  and  it 
mnsT;  suffice  to  present  certain  prominent  features  of  some  of  the 
more  viridely  used  methods  of  appraisal.  Of  first  rank  among  these, 
in  my  opinion, is  that  which  seeks  to  determine  the  actua-1  invest- 
ment in  the  property*  5 

Original  Cdso  to  Date;  This  ha.8is  of  appraisal  may  he  de- 
fined as  the  ascertainment  of  the  actual  investment  in  the  prop- 
erty to  the  time  of  the  valuation,  excluding  from  consideration 
articles  that  have  been  retired  or  incapacitated  for  further  ser- 
vice for  other  reasons.  That  is,  under  this  method,  the  object 
sought  is  the  determination  of  the  actual  cosu  of  the  plant  as  it 
exists  at  the  time  of  tlie  inq.uiry.  This  cost  could  usually  be 
readily  found  from  the  Plant  and  investment  account  if  the  books 
of  the  company  had  been  carefully  kept  and  proper  corrections  made 
from  time  to  time  for  retirements  and  for  additions  and  better- 
ments , 

unfortunately,  however,  the  books  and  records  of  the  company 
j usually  do  not  afford  direct  inforrmtion  concerning  the  actual  cost 
j of  the  property  as  it  exists  at  any  particular  time,  and  for  this 
I condition  of  affairs  there  a^re  a number  of  reasons.  In  the  first 
place  most  present-day  companies  are  the  outgrowth  of  much  smaller 
concerns,  the  Increase  in  size  being  effected  through  consolida- 
tions or  the  natural  growth  of  the  business.  During  this  period 
of  evolution  the  property  iriay  have  changed  hands  a number  of  times, 
the  system  of  bookkeeping  may  have  been  altered  to  suit  the  ideas 
of  different  men,  or  proper  corrections  may  not  have  been  made  for 


4:9 

changes  in  the  property  during  the  years  that  have  passed.  During 
the  process  of  evolution  hooks  and  records  have  become  lost  or  des- 
trtjyed  hy  fire,  flood,  or  other  mishap,  have  been  misplaced,  or 
become  no  longer  available  for  other  reasons,  in  brief,  the  record 
has  not  been  kept  up  to  daue  and  no  longer  reflects  the  actual  con-  | 
dition  of  the  property.  Then,  too,  the  books  may  have  been  opened 
in  the  beginning  upon  some  amount  assumed  as  reflecting  the  actual 
worth  of  the  property,  the  amounts  of  stocks  and  bonds  issued,  or 
upon  some  basis  other  than  the  actual  cost  of  the  property  at  that 
time.  If  this  has  been  done,  as  fre(iuently  is  the  case,  it  is  ev- 
ident the  Plant  and  Investment  account  7/ill  not  show  the  actual  in- 
vestment in  the  property. 

In  any  event,  it  may  be  said  that  the  amount  carried  in  this 
account  seldom  reflects  the  actual  cost  of  the  property.  Were  the 
opposite  of  this  statement  true,  1 am  of  the  opinion  there  might 
I never  have  arisen  other  methods  of  valuation,  for  it  appears  the 
: general  opinion  of  the  ordinary  citizen  that  the  actual  cost  af- 
fords the  true  basis  of  appraisals.  Inasmuch  as  the  reasons  for 

this  opinion  are  subseq.uently  presented  in  detail,  further  discus^ 

i 

i Sion  of  the  matter  at  this  place  need  not  be  indulged. 

Historical  Reproduction;  Palling  to  ascertain  the  actual  in- 
vestment in  the  property  from  the  books,  recourse  may  be  had  to  its 
ascertSwinment  as  nearly  as  possible  by  means  of  so-called  histori- 
cal reproduction.  This  basis  of  appraisal  may  be  defined  as  the 
determination,  as  nearly  as  possible,  of  the  actual  investment  in 
the  property.  Por  this  purpose  an  inventory  of  the  articles  comi- 


r 


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50 

prising  the  property  is  prepared,  and  to  them  are  appended  prices 
representing,  as  closely  as  possible  to  determine,  their  actual 
cost  to  install.  Of  Necessity  this  method  takes  cognizance  of  the 
history  of  the  property,  the  methods  used  in  its  constructioh,  and 
the  vicissitudes  through  which  it  has  passed,  hence  the  name. 

The  practical  procedure  of  determining  the  cost  of  histori- 
cally reproducing  the  property  is  identical  with  that  hereinbefore 
described  for  the  Portsmouth  street  Kailroad  and  Light  Company, 
beginning  on  page  44,  with  the  exception  that,  instead  of  applying 
the  averages  of  prices  during  a term  of  five  years,  there  would 
be  used  the  actual  cost  of  the  article,  as  determined  from  the 
books  and  records  of  the  company,  or  by  other  means.  Judging  by 
my  experience  in  the  matter,  it  usually  is  possible  to  determine 
q.uite  accurately  from  the  books  the  costs  of  about  seventy-five 
per  cent  of  the  property,  and  the  remainder  must  be  estimated  as 
nearly  as  it  can  be.  The  costs  of  the  larger  articles  are  q.uite 
conmionly  shown  on  the  books  of  the  company,  and  it  usually  is  pos- 
sible to  closely  estimate  the  costs  of  many  of  the  smaller  por- 
tions of  the  plant.  For  example,  in  a street  railway  system.,  the 
costs  of  the  cars  are  generally  reflected  on  the  books,  as  are  the 
amounts  expended  for  the  electrical  eq.uipment  for  the  rolling 
stock,  Comionly  this  portion  of  the  property  will  account  for  a- 
bout  one-third  of  the  whole.  The  costs  of  carbarns,  shops,  and 
power  houses  are  also  generally  known,  and  this  accounts  for  a con- 
siderable portion  of  the  whole.  The  airiounts  of  rail,  rail  fasten- 


51 

ings , 'ballp-st,  ties,  "bonds,  trolley  wire,  poles,  and  similar  part- 
icles are  easily  ascertained,  and  the  costs  of  certain  q.uantities 
of  these  are  always  shown  on  the  hooks.  Tor  example,  the  cost  of 
steel  rails  was  almost  constant  from  1900  to  1916,  hence  it  is 
clear  that  if  we  know  the  amount  of  rail  it  is  easy  to  fix  on  a 
price  that  shall  represent  its  actual  cost  within  a very  small 
percentage  of  error.  The  same  is  true  of  the  other  articles  com- 
prising  the  plant,  and  I am  of  the  opinion ^the  historical  cost  of 
reproducing  a property  may  he  ascertained  within  approximately 
two  percent  of  the  actual  cost.  For  all  practical  purposes  this 
may  he  considered  the  same  as  actual  cost,  and  for  purposes  of 
rate  making  it  is  my  opinion  that  the  cost  of  historical  reproduc- 
tion is  second  in  a minor  degree  only  to  the  value  of  the  actual 
cost  method. 

Post  of  Reproduction  at  the  Present  Time:  A method  of  apprais- 
al having  many  adherents,  and  widely  used  in  ra,te  oases,  is  that 
known  as  cost  of  reproduction  based  on  present  prices.  This  method 
may  he  defined  as  the  ascertainment  of  the  cost  of  reproducing  an 
identical  property,  using  prices  current  at  the  time  of  the  apprais- 
al. This  method  has  been  much  in  vogue  during  Pvnd  since  the  Inter- 
national War,  although  it  has  been  in  favor  almost  from  the  begin- 
ning of  modern  valuation  practice.  Possibly  the  reason  for  the 
favor  with  which  it  is  looked  upon  by  the  owners  of  utility  prop- 
erties arises  from  the  somewhat  higher  costs  it  gives  as  compared 
with  the  actual  costs  of  the  various  articles.  To  some  extent  the 


53 


greater  amount  o^btained  by  using  this  method  of  appraisal  is  offset 
by  the  fact  that  accrued  depreciation  is  commonly  deducted  there- 
from in  determining  the  rate  base.  This  practice  appears  in  strict 
accord  with  the  commonly  accepted  interpretation  of  the  rule  laid 
down  by  the  United  States  Supreme  Court  in  the  famous  Minnesota 
Rate  cases,  and  q.uoted  in  part  herein  on  page  37.  Under  normal  con- 
ditions this  deduction  usually  brings  the  rate  making  vsilue  of  the 
property  some?/here  in  the  vicinity  of  the  actual  investment  there- 
in, and  therefore,  insofar  as  amount  of  money  is  concerned,  does 
no  great  violence  to  the  writer’s  contentions  for  undenreoiated 
original  cost  as  the  proper  basis  for  rate  making.  However,  the 
difference  in  principle  is  very  great,  and  it  is  upon  principle 
that  I oppose  the  reproduction  theory  above  outlined.  Moreover, 
during  war  time,  the  costs  of  all  articles  have  so  enormously  in- 
creased as  to  render  excessive  the  costs  of  reproduction  of  prop- 
erties when  those  prices  are  used.  In  sub8eq.uent  pages  this  mat- 
ter will  be  more  fully  discussed,  hence  will  not  be  considered  at 
greater  length  in  this  place. 

In  the  practical  procedure  observed  in  making  an  appraisal 
upon  this  basis  there  is  no  substantial  departure  from  the  methods 
already  described  for  inventorying  the  property  of  the  Portsmouth 
Street  Railroa,d  and  Light  Company,  as  set  forth  on  page  44,  except 
that,  for  pricing,  costs  applying  at  the  time  of  valuation  are 
used.  Wherever  the  company  has  made  recent  purchases  of  an  article 


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53 

the  price  paid  therefor  is  used  in  the  appraisal,  and  this  usually 
can  he  done  in  the  oases  of  articles  which  are  freq^uently  purchas- 
ed, such  as  ties,  copper  wire,  poles,  or  similar  articles.  However, 
it  freq.uently  happens  that  the  company  has  made  no  recent  purchase 
of  certain  articles,  either  because  they  have  not  been  needed,  or 
perhaps  it  is  a machine,  a car,  or  similar  class  of  eq.uipment  that 
has  a comparatively  long  life  and  therefore  is  seldom  bought.  In 
such  oases  correspondence  may  be  had  with  manufacturers  of  the  same 
or  similar  articles,  and  the  costs  of  sma.ll  articles  ma,y  be  obtain- 
ed locally  in  many  cases.  For  many  articles  of  trivial  importance 
the  prices  may  be  deduced  with  sufficient  accuracy  from  catalogues 
of  firms  dealing  in  that  class  of  merchandise. 

Ascertainment  of  cost  of  reproduction  calls  for  wide  experi- 
ence by  the  appraiser  if  the  resulting  product  is  worthily  made, 
for  it  calls  for  the  exercise  of  mature  judgment  in  determining 
the  numerous  q.uestions  that  arise.  It  should  be  borne  in  mind 
that  reproduction  of  a plant  on  other  than  an  historical  basis  us- 
ually involves  assumptions  as  to  manner  of  doing  the  work,  method 
of  pricing,  or  other  factor  in  the  appraisal  which  it  is  impossible 
to  reconcile  with  conditions  existing  at  the  time  of  the  appraisal. 
For  example,  there  may  be  involved  the  q.uestion  of  reproducing  an 
old-style  pump  which  no  longer  is  made.  It  is  evident  that  no  as- 
sumption as  to  present  conditions  can  exactly  fit  the  circumstances 
surrounding  the  pump,  and  that  either  we  must  assume  the  cost  of 
actually  reproducing  the  pump  at  a cost  that  would  be  prohibitive. 


I u 


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54 

use  a price  that  will  install  a similar  pump  of  modern  type  and 
having  an  eq.ui valent  capacity,  or  fix  upon  a comparative  price, 
determined  hy  comparing  relative  price  changes  of  similar  articles 
with  that  of  the  particular  unit,  For  instance,  if  the  cost  of 
the  above  pump  he  known  for  a certain  year,  and  the  cost  of  a sim- 
ilar pump  which  is  still  made  can  he  ascertained  for  the  same  year 
and  also  at  the  time  of  valuation,  it  is  apparent  that  it  will  af- 
ford a reasonable  degree  of  accuracy  to  assume  that  the  pump  of 
discarded  pattern  would  follow  the  same  relative  price  changes  as 
would  the  other.  In  the  absence  of  other  data  this  plan  may  be 
some  times  used  with  advantage. 

Reproduction  cost  at  present  prices  has  long  been  used  as  a 
basis  for  appraisals  in  rate  oases,  usually  after  making  due  alw 
lowances  for  accrued  depreciation.  This  method  has  many  friends 
and  likewise  many  violent  enemies,  many  of  the  latter  having  been 
made  since  about  the  latter  part  of  1916  v/hen  the  abnormal  price 
changes  due  to  the  International  War  were  beginning  to  be  felt. 
Indeed,  many  utilities  and  others  have  gone  so  far  as  to  claim  it 
to  be  the  only  method  by  which  property  should  be  valued.  With 
this  view  1 am  not  in  agreement,  for  reasons  which  will  be  present- 
ed in  subseciuent  pages,  and  in  this  attitude  there  appears  support 
in  certain  court  oases.  In  the  Minnesota  Kate  cases,  supra,  the 
Court  stated: 

"The  Gost-of-reproduction  method  is  pf  service  in  ascertain- 
ing the  present  value  of  the  plant,  when  it  is  reasonably  applied 
and  when  the  cost  of  reproducing  the  property  may  be  ascertained 
with  a proper  degree  of  certainty.  But  it  does  not  justify  the  ac- 
ceptance of  results  which  depend  upon  pure  conjecture.”  (230  U.S, 
page  452) . 


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55 


When  compared  with  the  actual  cost  of  a composite  property, 
its  cost  of  reproduction,  using  present  prices,  varies  greatly 
v/ith  the  time  of  the  appraisal.  If  we  take  a property  that  was 
15  or  30  years  old  in  1915  and  had  made  an  appraisal  of  that  prop- 
erty in  1916,  we  should  have  found  a toxal  cost-new  about  ten  per 
cent  in  excess  of  the  actual  investment  therein.  Had  we  valued 
the  same  property  in  the  same  way  in  1919,  the  time  of  peak  prices, 
its  cost  of  reproduction  would  have  been  at  least  double  the  act- 
ual investment.  Ihe  writer  has  in  mind  a good-sized  street  rail- 
way system  in  Illinois  wherein  the  cost  of  reproduction  in  the  lat- 
ter part  of  1919  was  found  to  be  more  than  twice  the  investment  in 
the  property,  How  that  the  era  of  falling  prices  has  set  in,  the 
difference  between  actual  investment  and  the  actual  cost  of  such  a 
property  is  less  marked,  although  in  the  early  part  of  1923  it 
still  would  have  been  about  60  percent  greater. 

Reoroduotion  at  Average  Prices:  To  overcome  some  of  the 

objections  made  to  appraisals  prepared  upon  reproduction  bases  and 
using  war-time  prices,  there  has  been  devised  the  plan  of  substi-^^ 
tuting  for  those  prices  unit  costs  that  represent  averages  of  a- 
mounts  paid  for  articles  during  a term  of  years.  This  period,  of 
course,  may  be  for  any  particular  time  desired  by  the  appraiser, 
but  commonly  is  for  a term  of  either  five  or  ten  years  next  pre- 
ceding the  time  of  appraisal.  As  shown  on  page  45  a term  of  five 
years  next  prior  to  the  time  of  valuation  is  favoiedby  the  Ohio 
Public  Utilities  CoiMiission,  in  many  cases  valuations  prepared 
upon  the  basis  of  ten-year  average  prices  have  been  used  in  other 


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56 

localities.  Almost  ■uniformly  such  appraisals  choose  the  five-  or 
ten-year  period  immediately  preceding  the  time  of  valuation,  al- 
though there  are  occasional  instances  in  which  the  same  principle 
is  invoked  hy  using,  say,  the  five-year  period  from  1912  to  1916, 
inclusive,  or  the  ten-year  period  from  1909  to  1918,  inclusive. 

Average  prices  have  the  merit  of  leveling  off  excessive  price 
changes,  and  this  applies  to  ahnormal  sags  in  market  prices  as 
well  as  to  peaks.  In  my  opinion  they  are  preferable  to  any  apprais 
al  'made  upon  the  basis  of  cost  of  reproduction  and  using  prices 
current  at  the  time  of  the  valuation.  This  is  because  abnormal 
fluctuations  in  costs  are  not  capitalized  against  either  the  com- 
munity or  the  utility,  and  therefore  injustice  may  be  the  less 
flagrant  in  the  event  a rate  inciuiry  is  brought  at  a time  of  rapid 
or  excessive  price  changes. 

In  preparing  an  appraisal  using  average  prices  there  is  but 
little  practical  difference  between  the  procedure  for  ascertain- 
ing the  cost  of  reproduction  at  present  prices  and  the  reproduc- 
tion cost  on  any  other  basis  of  pricing.  However,  in  average  cost 
appraisals  there  is  the  distinct  merit  of  having  greater  latitude 
in  the  selection  of  costs.  If  either  a five-  or  a ten-year  period 
be  chosen,  it  is  certain  that  within  that  time  a considerable  part 
of  the  property  has  been  installed  or  at  least  renewed,  so  that, 
particularly  for  the  ten— year  period,  there  is  commonly  but  little 
difficulty  in  obtaining  a proper  range  pf  prices,  in  articles  of 
freq.uent  purchase,  such  as  poles,  ties,  copper  wire,  rail,  meters, 


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57 

and  many  others,  purohases  are  usually  found  in  eaoh  year,  and 
sometimes  several  times  in  one  year,  in  such  cases  the  ascer- 
ta,inment  of  the  average  prices  is-  comparatively  simple,  as  all 
that  is  necessary  is  to  take  the  arithmetical  averages  of  a num- 
ber of  representative  purchases  and  apply  these  averages  to  the 
(luantities  determined  by  the  field  inventory.  Should  articles 
like  engines,  pumps,  oars,  or  other  long-lived  eq.uipment  not  have 
been  purchased  within  the  period,  then  it  is  comparatively  a simp- 
le matter  to  obtain  them  from  manufacturers  or  dealers,  especial- 
ly where  the  company  has  purchased  its  supplies  from  only  a few 
sources,  as  commonly  is  the  case. 

The  reproduction  cost  of  a composite  property,  determined 
upon  a basis  of  five-year  average  prices  will  differ  from  the 
actual  cost  of  the  property  by  amounts  dependent  upOn  the  five 
years  chosen.  If  we  take  a property  which  was  15  or  SO  years  old 
in  1916,  and  determine  its  reproduction  cost  based  upon  average 
prices  during  the  five  years,  191S  to  1916,  inclusive,  we  shall 
find  its  cost-ne?/  about  20  percent  in  excess  of  the  actual  invest- 
ment in  the  property.  If  we  use  the  five  years,  1917  to  1921,  in- 
clusive, we  shall  find  the  cost  new  will  be  about  72  percent  in 

excess  of  the  actual  investment  in  the  plant.  If  we  use  the  aver- 

age prices  prevailing  during  the  10— year  period,  1907  to  1916, 
the  cost  new  will  be  only  about  ten  percent  in  excess  of  the  ac- 
tual investment,  and  if  vie  use  the  ten  years  1911  to  1920,  inclus- 
ive, we  shall  have  a cost  about  30  percent  in  excess  of  the  actual 


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58 

oost  of  the  plant.  These  relative  costs  will  vary,  of  course, 
with  the  difference  in  utilities,  hut  will  afford  an  approximate 
idea  of  the  differences  between  the  several  methods  of  determining 
reproduction  costs. 

Rate  Base;  In  a rate-fixing  proceeding  the  rate  base  may 
be  defined  as  the  amount  upon  which  the  utility  may  rightfully 
expect  a reasonable  return  in  the  way  of  charges  for  the  services 
it  supplies.  Such  a definition  naturally  implies  that  this  a- 
mount  is  fixed  by  a state  or  other  regulatory  jurisdiction  in  the 
matter,  and,  in  reality,  is  the  sum  variously  called  "value  of 
the  property”,  fair  value,  or  by  similar  term. 

Included  in  the  property  which  goes  to  make  up  the  fair  val- 
ue are  all  articles  commonly  considered  as  comprising  the  operat- 
ing property,  that  is,  the  eg.uipment  actually  used  in  producing 
the  services  which  the  utility  furnishes  its  consumers.  Excluded 
from  the  rate  base  will  be  the  value  of  articles  whicsrh  are  no 
longer  serviceable  or  which  may  have  been  used  at  one  time  but  not 
now  needed.  Thus,  a company  may  have  a boiler  pump  which  it  has 
replaced  with  a more  modern  design  or  one  of  larger  capacity,  al- 
though the  old  one  is  still  useful.  However,  usually  the  value 
of  the  old  pump  would  be  excluded  from  the  rate  base  because  it 
is  improbable  that  it  will  be  used  again  in  the  service.  Also, 
a street  railway  track  may  have  been  useful  at  one  time,  but,  ow- 
ing to  a change  in  routing  of  oars,  it  is  no  longer  used.  Unless 
the  company  could  show  a strong  probability  the  track  might  again 


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59 

be  needed,  its  value  would  be  excluded  from  the  rate  base  under 
modern  theories  of  rate  making.  On  the  other  hand,  the  company 
may  own  a considerable  tract  of  land  which  is  not  used  at  the 
present  time,  but  which  it  holds  for  purposes  of  future  develop- 
ment, such  as  the  construction  of  a power  station,  gas  tank,  or 
other  necessary  facility  in  its  business.  In  such  cases,  unless 
the  amount  of  land  so  held  is  clearly  excessive,  its  value  is 
properly  includible  in  the  rate  base.  For  the  company  is  bound 
to  use  conservative  methods  in  providing  against  its  future  needs, 
and  it  would  be  an  unwise  regulatory  authority  that  would  deny 
the  right  to  provide  reasonable  (quantities  of  land  for  future  ex- 
tensions , 

Thus  is  brought  out  one  of  the  differences  between  the  rate 
making  value  of  the  property  and  its  market  value,  or  possibly 
the  value  for  taxation  purposes.  For  the  rate  making  value  exclud- 
ing, as  it  does,  all  unnecessary  property,  may  be  substantially 
less  than  the  market  or  tax  value,  for  the  two  latter  values  do 
not  distinguish  between  the  operating  and  non-operating  character 
of  the  articles  unless  they  no  longer  have  any  value  whatsoever. 
That  is,  in  the  last  example  mentioned,  the  land  held  in  excess 
of  the  reasonable  req.uirements  of  the  company  would  not  be  includ- 
ed in  the  rate  value,  but  it  could  be  easily  sold,  and  undoubted- 
ly taxes  are  annually  paid  upon  it. 

Oorimionly  the  rate  base  for  a particular  utility  is  determined 
by  the  regulatory  commission  having  jurisdiction  after  an  exhaust- 


60 


ive  proceeding  wherein  all  interested  parties  are  given  the  op- 
portunity to  appear  and  place  in  evidence  all  facts  having  hear- 
ing upon  the  q,uestions  at  issue.  OoKimonly  the  procedure  before 
a regulatory  commission  is  not  confinea  to  the  strict  lines  of 
legal  cases,  the  intent  being  to  secure  any  and  all  facts  that 
may  throw  light  upon  the  matter.  All  evidence  is  presented  under 
oath,  and  the  statute  prescribes  severe  penalties  for  willful  mis- 
representation of  facts  by  any  witness.  In  a typical  rate  case 
before  a state  commission  the  matter  may  arise  upon  petition  of 
the  company,  a municipality,  or  a consumer  of  the  services  sup- 
plied by  the  corporation.  Complaints  as  to  rates  or  appications 
for  increases  are  usually  filed  in  prescribed  form,  although  this 
is  not  necessary  in  order  to  satisfy  the  statute.  Usually  there 
is  filed  a brief  statement  supporting  the  allegations,  and  within 
a specified  time,  usually  ten  days,  the  comrrdssion  will  serve  not- 
ice upon  municipal  authorities,  the  utility,  or  others  likely  to 
be  interested  in  the  case.  The  matter  is  set  for  formal  hearing 
before  the  conmiission  or  some  examiner  appointed  by  it,  and  at 
these  hearings  full  opportunity  is  afforded  each  side  in  the  con- 
troversy to  present  all  the  facts  in  its  possession.  These  us- 
ually comprise  complete  operating  statements  of  the  company  for  a 
number  of  years  preceding  the  time  of  the  inq.uiry,  together  with 
an  appraisal  of  the  property,  the  amounts  of  outstanding  securi- 
ties, and,  in  short,  a complete  history  of  the  company  and  the 
results  of  its  operations.  After  the  close  of  the  hearing  each 
side  is  privileged  to  file  briefs  stating  its  particular  views 


61 

upon  the  matter.  Thereafter  the  Commission  takes  the  oase  under 
advisement,  and  in  due  time  renders  its  decision.  Statutes  com- 
monly provide  right  of  appeal  to  the  courts  through  specified  chan- 
nels, and  the  issues  in  any  particular  matter  have  the  same  right 
of  final  determination  hy  high  courts  as  do  other  like  causes. 

In  placing  in  evidence  facts  concerning  the  value  of  the  prop- 
erty of  a public  utility  there  generally  is  engendered  a spirited 
controversy,  the  utility  seeking  to  secure  as  large  a valuation  as 
possible,  and  its  opponents  exerting  their  efforts  to  keep  the  fig- 
ure as  small  as  they  can.  Quite  freq.uently  evidence  takes  the  form 
of  seeking  to  disprove  the  claim  of  one  or  the  other  side  as  to  the 
value  of  a particular  article,  as  a gas  tank,  engine,  bridge,  or 
other  article  of  property.  Also,  there  freq.uently  is  controversy 
as  to  whether  a particular  piece  of  equipraent  is  useful  or  neces- 
sary in  the  conduct  of  the  enterprise,  and  much  testimony  is  given 
in  support  of  the  various  contentions.  In  general,  it  may  stated 
that  the  best  interests  of  ail  parties  are  served  where  valuations 
upon  two  or  more  bases  are  placed  in  evidence.  At  least,  such  is 
the  present  status  of  the  matter,  although  hereinafter  attempt 
will  be  made  to  show  that  one  only  is  necessary,  provided,  always, 
that  that  one  is  the  actual  investment  in  the  plant. 

Included  in  the  property  of  practically  every  public  utility 
there  will  be  found  articles  composing  the  physical  plant,  hence 
designated  as  physicals;  other  elements  of  value  which  may  or  may 
not  directly  form  a portion  of  the  costs  of  the  physical  items, 
commonly  called  overheads,  and  a third  class  of  values  forming 


62 

elements  of  value  not  includi'ble  under  either  of  the  foregoing 
heads.  These  elements,  such  as  going  value,  cost  of  attaching 
or  developing  the  husiness,  and  similar  values,  are  generally 
known  as  intangihles,  and  constitute  the  most  difficult  class  of 
values  to  ascertain.  While  extended  discussion  of  the  various 
elements  of  value  is  outside  the  limits  of  this  article,  never- 
theless "brief  mention  may  he  made  of  some  of  the  more  salient 
features. 

Appraisal  of  most  of  the  physical  items  of  the  property  is 
usually  made  without  much  difficulty,  and  consists  principally  in 
applying  unit  prices,  determined  upon  some  one  of  the  bases  here- 
inbefore described,  to  the  several  articles  which  go  to  make  up 
the  plant.  Controversies  concerning  these  articles  coirmionly  are 
limited  to  the  question  as  to  whether  a particular  piece  of  equip- 
ment is  useful  in  the  conduct  of  the  business  of  the  company,  or 
whether  it  is  not.  Occasionally  the  value  assigned  to  a paruicu- 
lar  unit  may  be  attacked,  but  this  forms  the  exception  to  the  rule. 
Frequently  disputes  will  arise  as  to  the  physical  condition  of  the 
article,  however,  but  this  forms  another  question,  though  one  that 
is  directly  related  to  the  value  of  the  equipment. 

Land,  however,  forms  an  exception  to  the  general  statements 
contained  in  the  paragraph  next  above,  and  commonly  forms  the  ob- 
ject of  violent  controversy.  As  is  well  known,  land  is  one  of 
the  most  difficult  physicals  there  is  to  value,  principally  be- 
cause it  largely  forms  a matter  of  opinion  and  because  there  is  no 


63 


standardized  market  value  for  particular  classes  or  parcels  of  real 
estate,  as  is  the  case  with  other  plant  eq_uipment,  in  other  Y/ords, 
each  parcel  of  land  is  a law  unto  itself,  and  so  many  elements  of 
uncertainty  enter  into  its  makeup  of  value  tat  no  one  has  been 
able  to  lay  down  any  rules  for  ascertaining  its  worth.  Apropos  of 
the  wide  differences  of  opinion  that  may  exist  among  reputable  and 
disinterested  persons,  the  writer  recalls  one  tract  of  land  along 
the  Mississippi  river  which  entered  into  a matter  that  came  before 
the  Illinois  Public  utilities  Coirmission.  Testimony  was  offered 
in  support  of  values  for  this  tract  that  ranged  all  the  way  from 
nothing  to  $15,000  an  acre  I 

Among  other  things,  in  the  famous  Minnesota  Rate  Cases,  the 
United  States  Supreme  Court  stated: 

’^Assuming  that  the  comipany  is  entitled  to  a reasonable  share 
in  the  general  prosperity  of  the  comr.iunities  v;hich  it  serves,  and 
thus  to  attribute  to  its  property  an  increase  in  value,  still  the 
increases  so  allowed,  apart  from  any  improvements  it  may  make, 
C9.nnot  extend  properly  beyond  the  fair  s<verage  of  the  normial  mark- 
et value  of  land  in  the  vicinity  having  a similar  character.  Other-’ 
wise  we  enter  the  realm  of  mere  conjecture,  ^e  hold  therefore  that 
it  was  error  to  base  the  estimates  of  value  of  the  right  of  way, 
yards  and  terminals  upon  the  so-called  ’railvmy  value’  of  the  prop- 
erty. The  company  certainly  would  have  no  ground  for  complaint  if 
it  were  allowed  a value  for  these  lands  eq,ual  to  the  fair  average 
market  value  of  similar  lands  in  the  vicinity  without  additions  by 
the  use  of  multipliers,  or  otherwise,  to  cover  hypothetical  out- 
lays. The  allowances  miB.de  below  for  conjectural  cost  of  acquisi- 
tion and  consequential  damages  must  be  disapproved;  and,  in  this 
view,  we  also  think  it  was  error  to  add  to  the  ortiount  taken  as  the 
present  vsJue  of  the  lands  the  further  sums,  calculated  on  that 
value,  v;hioh  were  embraced  in  the  items  of  ’engineering,  superin- 
tendence, legal  expenses,  contingencies  and  interest  during  con- 
struction.” (230  U.  S.  page  455). 

The  rule  thus  laid  down  by  the  court  specifically  prohibits 
the  use  of  multipliers  and  the  inclusion  of  certa.in  other  auxilia,ry 
costs.  The  construction  of  the  remaining  portion  of  the  excerpt 


64 


has  "been  variously  interpreted  hy  the  carriers,  the  states,  and 
others  interested  in  the  matter.  However,  regardless  of  the  dif- 
ferences of  opinion  in  this  respecx , corrimissions  generally  in- 
clude in  the  fair  rate  making  value  of  a public  utility  property 
the  fair  present  market  value  of  lands,  based  upon  the  worth  of 
similar  lands  in  the  immediate  vicinity.  This  rule,  which  may 
be  well  considered  as  a conservative  interpretation  of  the  rule 
of  the  court,  has  been  followed  by  the  Interstate  Commerce  Commiis- 
sion  in  valuing  the  lands  of  the  common  ca,rriers.  As  will  be  seen 
by  referring  to  the  table  on  a subseq.uent  page  of  this  article, 
most  of  the  state  commissions  follow  this  interpretation  of  the 
rule  of  the  court,  hence  the  principal  controversies  that  arise 
relate  more  to  what  constitutes  the  present  market  value  of  the 
land  than  as  to  whether  that  value,  original  cost,  or  some  other 
cost  should  be  used.  In  appraisals  it  has  been  the  practice  of 
the  writer  to  ascertain  the  market  value  of  adjacent  lands  from 
records  at  the  county  seat,  measuring  these  values  by  considera- 
tions paid  for  the  parcels . The  values  thus  obtained  are  supple- 
mented by  opinion  vaJ.ues  of  real  estate  men,  bankers,  or  others 
having  knowledge  of  local  real  estate  values. 

The  elements  of  value  coiranonly  called  overheads  generally 
include  engineering  and  superintendence,  legal  expenses,  injur- 
ies and  damages,  interest  during  construction,  and  organization 
expenses  of  the  company.  While  these  elements  of  cost  generally 
are  incurred  in  connection  with  the  installation  of  physical  art- 


65 

ioles  of  property,  nevertheless  the  expenses  thus  incurred  cannot 
usually  he  allocated  to  particular  pieces  of  equipment.  While 
the  amounts  of  overheads  form  the  subjects  of  freq.uent  controvers- 
ies in  rate  proceedings,  their  inclusion  is  proper  upon  the  weight 
of  authority.  Two  general  methods  a.re  followed  in  determining  the 
costs  of  engineering,  for  example,  one,  the  use  of  a percentage 
of  the  cost  of  certain  physical  property,  and,  two,  the  cost  of 
an  organization  estimated  as  sufficient  to  perform  the  necessary 
services  during  construction.  Both  methods  have  their  proponents 
and  enemies,  but  the  limited  length  of  this  article  prohibits  dis- 
cussion of  the  relative  merits  of  each.  Briefly,  the  writer  pre- 
fers the  synthetic  method,  that  is,  where  the  cost  of  the  assumed 
organization  is  determined. 

The  th3i?d  class  of  elements  of  value  are  the  so-called  intan- 
gibles, of  which  the  well-known  ’’going  value”  forms  the  most  con- 
spicuous example.  Intangibles  have  ever  been  a fruitful  source  of 
contention  in  ra,te-fixing  procedures,  and  probably  will  continue 
as  the  storiTi  center  of  similar  future  matters.  This  probably  a- 
rises  because  of  the  nature  of  the  elemient  of  value,  and  also  be- 
cause it  frequently  is  made  the  vehicle  for  the  inclusion  of  pre- 
posterous ’’values”  in  an  appraisal  v/hen  it  is  a miatter  of  comimon 
comprehension  that  no  such  values  attached  to  the  pa.rticular  prop- 
erty in  question.  Probably  the  custom  of  injecting  large  hypo- 
thetical values  through  the  medium  of  ’’going  value”  is  largely 
responsible  for  the  difficulties  that  almost  invariably  attend  its 
introduction  into  a rate  case.  In  other  words,  it  is  not  so  much 


66 


the  existence  of  tne  element  as  the  amount  thereof  that  forms  the 
source  of  discord. 

Concerning  this  element  of  value  the  United  States  Supreme 
Court,  in  the  Des  Moines  Gas  case,  stated: 

"That  there  is  an  element  of  value  in  an  assembled  and  es- 
tablished plant,  doing  business  and  earning  money,  over  one  not 
thus  advanced,  is  self-evident.  This  element  of  value  is  a prop- 
erty right,  and  shou;j.d  be  considered  in  determining  the  value  of 
the  property,  upon  which  the  owner  has  a right  to  make  a fair  re- 
turn when  the  same  is  privately  owned  although  dedicated  to  pub- 
lic use," 

In  commenting  upon  the  intangible  element  of  "going  value", 
the  Illinois  Supreme  Court  stated: 

"The  element  of  value  which  is  the  subject  of  serious  con- 
tention between  the  parties  to  this  litigation  is  what  is  known 
as  ’goi^jg  value’.  In  view  of  the  settled  law  on  this  subject  the 
q.uestion  is  no  longer  open  to  discussion.  That  a going  concern 
has  a value  over  and  above  the  value  of  the  physical  property  is 
self-evident.  From  the  nature  of  this  element  of  value  it  cannot 
be  arrived  at  with  mathematical  accuracy,  but  mmst  necessarily 
be  considered  in  the  light  of  the  facts  in  each  particular  case." 
(City  of  Springfield,  ex  rel,  etc.,  v.  Springfield  Gas  & Fleotric 
Company,  S91  Illinois  238), 

In  view  of  the  foregoing  it  s.ppears  clear  that  the  elem^ent 
of  going  value  must  be  considered  in  a rate  determination.  Many 
methods  for  determining  this  element  have  been  proposed,  but  none 
has  gained  any  considerable  application,  and  it  is  beyond  the 
scope  of  this  article  to  discuss  the  merits  of  the  different  rules 
Probably  a simple  rule  that  is  as  accurate  as  any  now  used  is  to 
allow  approximiately  ten  per  cent  of  the  value  of  the  physical 
property,  including  overheads,  for  the  elem.ent  of  going  value. 

Deureciglion:  Depreciation  may  be  defined  as  the  loss  in 


67 

value  of  an  article  due  to  use,  wear  and  tear,  the  lapse  of  time, 
action  of  the  elements,  chsolescence,  supersession,  or  other  cause. 
It  is  well  known  that  practically  all  equipment  used  hy  a public 
service  corporation,  as  well  as  that  used  hy  all  other  persons,  is 
subject  to  deterioration  from  the  above  causes,  and,  despite  all 
that  can  be  done  in  the  way  of  maintenance  of  the  articles,  they 
finally  come  to  the  end  of  their  useful  lives  and  must  be  replaced. 
Argument  is  not  needed  in  support  of  the  contention  that  deprecia- 
tion exists,  for  all  a,re  familiar  with  its  effects  in  their  every- 
day lives,  Nor  can  space  here  be  taken  to  indulge  in  the  various 
theories  of  depreciation  and  their  application  to  particular  cases. 
For  present  purposes  it  will  be  sufficient  to  point  out  that,  in 
the  preparation  of  the  ordinary  public  utility  appraisal,  depreci- 
ation is  commonly  determined  by  one  of  two  well-known  methods,  (1) 
inspection,  and  (2)  by  the  use  of  mortality  or  life  tables. 

Under  the  first  method  the  article  is  inspected,  and  suitable 
measurements  are  made  to  detertiine  the  amount  of  wear  or  possible 
loss  of  value.  From  the  results  of  these  observations  and  mieasure- 
ments  the  relative  percentage  condition  of  the  article  is  determ- 
ined as  compared  with  its  new  condition.  Having  ascertained  its 
physical  condition  the  corresponding  loss  in  value  is  obtained  by 
merely  multiplying  the  cost-new  by  the  percentage  condition  obtain- 
ed as  above,  making  due  allowances  for  scrap  value,  if  such  exists. 

Under  the  second  method  the  appraiser  Diakee  use  of  so-called 
life  Cor  miortality)  tables,  which  are  merely  tables  showing  the 


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68 

prolDalDle  serviceable  lives  of  various  classes  oi*  eq^uipinenx  under 
noriueil  operating  conditions,  these  lives  "being  "based  on  the  ex- 
periences of  engineers,  operators,  or  others  having  to  do  with  the 
particular  articles  involved.  The  age  of  a particular  unit  is  us- 
ually easily  ascertained  frorn  the  records  of  the  company,  and  this 
age,  compared  with  the  pro"ba"ble  life  of  that  article,  at  once  furn- 
ishes its  percentage  condition,  when  the  loss  in  value  may  "be  com- 
puted as  in  the  preceding  case. 

Fre(iuently  a combination  of  the  two  methods  is  of  service,  es- 
pecially in  those  cases  7/here  an  article  is  su"bjected  to  unusual 
wear.  Thus,  ordinary  lap-welded  steel  pipe  may  have  a service  life 
of  eight  or  ten  years  when  used  under  normal  operating  conditions 
for,  say,  water  service.  But  the  water  may  contain  su^bstances  that 
q.uickly  corrode  the  pipe,  and  it  may  fail  to  "be  of  use  during  more 
than  a fraction  of  its  estimated  pro"ba"ble  life  as  disclosed  "by 
ta"bles.  Hence  it  always  is  the  part  of  wisdom  to  inspect  articles 
whose  depreciated  condition  is  to  he  ascertained  in  order  tha,t  in- 
consistent results  may  he  avoided. 

The  experience  of  the  writer  strongly  inclines  him  to  the  use- 
fulness of  the  life-tahle  method,  supplemented  hy  inspection.  In 
practice  there  freq.uently  arises  the  case  of  an  article  which  ap- 
parently has  a long  life  when  judged  hy  the  inspection  method  a- 
lone.  Thus,  a turbine  engine  may  he  apparently  performing  satis- 
factory service  after  the  lapse  of  ten  years,  and  the  inspection 
method  would  place  upon  it  a high  percentage  value,  nevertheless. 


69 


the  general  experience  of  manufacturers,  engineers,  and  operators 
of  such  engines  show  that  such  machines  are  superseded  after  per- 
iods ranging  from  ten  to  uwenty  years.  In  this  case,  then,  the 
use  of  life  tables  would  give  more  consistentresulxs , As  an  ex- 
ample of  the  absurdities  to  which  the  ill-advised  use  of  inspec- 
tion may  sometimes  reach,  the  v/riter  has  in  mind  the  case  of  a 
steel  water  tank  in  which  the  appraiser  fixed  a value,  determined 
by  inspection,  that  would  have  given  the  tank  a life  of  EOO  years, 
clearly  revealing  a lack  of  understanding  of  the  matter  that  was 
larr-en  table . 

Other  Plements  of  Value;  In  addition  to  the  elements  of  val- 
ue above  set  forth,  there  are  certain  others  commonly  included  un- 
der the  general  heading  of  intangibles.  Among  these  may  be  men- 
tioned good-will,  cost  of  establishing  the  business,  financing  the 
enterprise,  value  of  strategic  location,  solidif ica>tion  of  railway 
embankments,  and  others  of  similar  nature.  In  a large  sense  these 
elements  may  be  considered  as  merely  modif ica-tions  of  the  element 
of  going  value,  hereinabove  discussed,  and  they  commonly  are  sub- 
ject to  the  same  legal  and  engineering  rules  of  determina.tion  as 
that  value.  There  is  not  space  in  this  article  to  even  attempt 
a discussion  of  the  relative  merits  of  their  inclusion  or  exclus- 
ion from  an  appraisal,  hence  none  is  given.  In  his  personal  ex- 
perience the  writer  has  preferred  to  ’’lump”  all  these  elements  of 
value  into  the  one  general  allowance  of  ten  percent,  described  on 
page  66,  this  method  probably  performing  as  efficient  service  as 
would  more  elaborate  treatments  based  on  assumptions  that  rendered 


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70 


1ii  e results  no  more  relia-lDle  or  accurate  than  does  the  simpler 
process  thus  used. 

Commission  Bases  of  Valuation:  In  pra.ctically  every  state 

of  the  Union  there  is  now  a regulatory  commission  having  more  or 
less  jurisdiction  over  the  rates  and  services  furnished  hy  public 
service  corporations.  It  is  to  he  expected  these  organizations 
should  have  the  expert  experience  and  knowledge  req.uired  for  the 
successful  determination  of  the  issues  presented  to  them  in  rate 
matters  and  others  involving  complaints  of  service.  The  writer 
therefore  undertook  to  acq.uire  a general  idea  as  to  the  relative 
practices  of  the  various  commissions,  especially  as  they  concern- 
ed the  valuation  of  property  coming  under  their  scrutiny.  T’or  the 
purpose  of  affording  comparative  data  there  was  prepared  the  fol- 
lowing letter,  a copy  of  which  was  forwarded  to  each  state  and  ter- 
ritorial commission: 


71 


"In  support  of  my  application  for  the  degree  of  civil  en- 
gineer from  the  University  of  Illinois,  1 am  preparing  a thesis 
on  VALUE  FOR  RATE  MAKING  PURPOSES,  and  desire  to  incorporate 
therein  data  concerning  the  attitudes  of  the  several  state  com- 
missions towards  various  bases  of  appraisals  used  for  public  u- 
tility  properties.  With  this  purpose  in  view,  I should  greatly 
appreciate  answers  from  your  Commission  to  the  following  q.uestions: 

1.  When  was  the  Commission  first  organized? 

2.  Please  check  off  on  the  following  list  those  utilities 

over  which  the  Commission  has  rate  making  authority: 


3.  Has  the  Commission  officially  adopted  any  particular 

basis  of  appraisal  for  public  utility  properties, 
and  if  so,  what? 

4.  if  none  has  been  adopted  officially,  does  the  Commission 

advocate  or  give  preference  to  a particular  basis?  If 
so,  what? 

5.  is  accrued  depreciation  deducted  when  determining  the 

rate  base? 

6.  What  value  is  acceptable  for  land? 

(Present  value  of  adjacent  similar  lands,  or  other) 

Thanking  you  for  your  trouble  in  the  matter,  and  assuring 
you  of  my  appreciation  of  your  courtesy,  I rema.in. 


Street  Railway 
Electrical 
Water 
Telephone 


Interurban  Railway 

Gas 

Heat 

Warehouse 


Very  truly  yours. 


(Signed)  H.  E.  Bartlett 


1447  East  66th  Place,  Chicago. 


January  16,  1922 


72 


Courteous  replies  to  this  letter  were  received  from  nearly 
all  the  commissions  addressed,  and  many  of  them  forwarded  printed 
opinions  and  orders  in  which  the  answers  to  certain  of  the  ques- 
tions were  amplified,  it  is,  of  course,  impraoticahle  to  repro- 
duce these  letters  in  full  within  the  limits  of  this  article,  and 
therefore  the  following  surmuary  has  been  prepared  which  briefly 
presents  the  various  views  and  data  as  nearly  as  possible.  It  is, 
of  course,  clear  that  due  latitude  must  be  exercised  in  placing 
constructions  upon  the  answers,  as  each  commission  necessarily  is 
compelled  to  be  governed  by  particular  facts  in  a given  case,  so 
that  no  iron-clad  rule  for  restricting  its  freedom  could  be  adopt- 
ed, 

For  example,  many  commissions  accept  as  evidence  appraisals 
made  upon  any  common  or  accepted  basis,  and  from  these  appraisals 
and  supporting  evidence  finally  determine  the  rate  making  value  of 
the  property.  During  the  course  of  the  hearing  it  is  quite  possi- 
ble that  appraisals  made  upon  two  or  three  bases  mpvy  be  submitted, 
and  in  such  cases  the  corimiisslon  must  entertain  them.  Thus,  the 
writer  has  in  mind  cases  arising  before  the  Illinois  Public  utili- 
ties Commission  in  which,  during  the  course  of  the  hearings,  ap- 
praisals of  the  same  property  were  filed  in  evidence,  these  having 
been  made  upon  the  basis  of  original  cost,  or  reproduction  at  ex- 
isting prices,  and  upon  ten-year  average  prices.  These  several  el- 
ements were  considered,  and  each  was  given  due  consideration,  after 
which  the  Commission  fixed  the  rate  making  value. 


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73 


Alabama t Uo  information. 

Arizona:  Arizona  Corporation  Oomiriission  organized  April  28, 

1912.  It  has  Jurisdiction  over  stej-im,  street,  and  interurhan 
railroads,  electrical,  gas,  water,  telephone,  warehouse,  and  heat- 
ing utilities,  although  there  is  none  of  the  latter  in  the  state 
at  present.  The  Commission  has  not  officially  adopted  any  basis 
of  appraisal.  Reproduction  value  has  been  given  preference  as  a 
rate  base.  Accrued  depreciation  has  been  deducted  where  same  has 
been  found  to  exist.  Values  of  land  are  based  upon  the  Judgment 
of  those  familiar  with  real  estate  in  the  particular  locality, 

Arkansas : Arkansas  Railroad  Commission;  By  act  of  the  gener- 

al assembly  of  1921  the  Corporation  Commission  (created  by  act  ap- 
proved April  1,  1919)  was  abolished  and  was  superseded  by  the 
first-named  commission.  The  Arkansas  Railroad  Commission  has  no 
Jurisdiction  over  public  utilities  within  incorporated  cities  ahd 
towns,  and  therefore  has  very  little  to  do  with  making  rates  for 
any  public  service  corporation. 

California;  Railroad  Commission  of  the  Sts-te  of  California: 
Commission  originally  organized  in  1897,  with  Jurisdiction  over 
railroad  corporations  only,  but  on  March  23,  1912  assumed  control 
over  other  utilities,  including  steam,  street,  and  interurban 
railroads,  electric,  gas,  water,  telephone,  steam  heat,  warehouse, 
water  carriers,  telegraph  lines,  oil  pipe  lines,  cold  storage 
warehouses,  and  automobile  stage  lines.  The  Commission  has  not 
officially  adopted  any  basis  of  valuation,  but  in  general  for  rate 
making  inq.uiries  it  determines  the  depreciated  reproduction  value, 
and  adds  intangible  values  decreed  by  court.  Accrued  deprecia- 
tion is  deducted,  as  is  also  obsolescent  or  useless  property.  For 
land  the  Commission  usually  adopts  the  actual  value  as  determined 
by  recent  transfers  of  adjacent  similar  real  estate, 

Colorado : Public  Utilities  Commission  of  the  State  of  Color- 

ado; Commission  created  in  1913,  superseding  the  Colorado  Rail- 
road Commission,  organized  in  1885.  Commission  has  Jurisdiction 
over  steam,  street,  and  interurban  railroads,  and  electric,  water, 
telephone,  and  gas  utilities.  Has  not  officially  adopted  any  bas- 
is of  appraisal.  Generally  an  original  cost  basis  has  been  s^uth  ^ 
in  establishing  rate  base,  and  freg.uently  both  reproduction  cost 
new  and  original  cost  have  been  used  in  evidence.  In  several  rec- 
ent oases  reproduction  cost  new  appears  to  have  been  favored.  In 
general,  accrued  depreciation  has  not  been  deducted  from  the  fair 
value  of  the  property  in  determining  rate  base,  but  some  devia- 
tions have  been  made.  For  land  there  generally  has  been  used  the 
evidence  of  prominent  local  real  estate  men. 


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Connecticut ; Ho  inforraation. 

Delaware;  Has  no  commission. 

District  of  Colum'bia;  PulDlic  Utilities  Commission  of  the 
District  of  Columbia  cree,ted  by  Ac^t  of  Congress,  approved  March  4, 
1915.  Commission  has  jurisdictioniover  street  railways,  electric, 
gas,  telephone,  bagga,ge  transfer,  tojcicab,  and  motorbus  utilities. 
As  nearly  as  can  be  determined  from  the  printed  opinion  of  the  Com- 
mission in  its  opinion  in  the  matter  of  the  valuations  of  the  Cap- 
ital Tra,ction  Company  and  the  Washington  Railway  a.nd  Electric  Comp- 
any, the  cost  of  reproduction  less  accrued  depreciation  is  favored, 
with  la,nd  values  approximating  those  of  similar  adjPvCent  real  es- 
tate, 

Elorida:  Florida  Railroad  Commission  v/as  first  organized  in 

1887;  was  abolished  in  1891;  and  reorea>ted  in  1897.  The  Commis- 
sion has  jurisdiction  over  steam  and  street  railroads  and  telephone 
utilities.  Ho  official  basis  of  valuation  has  been  adopted,  but 
Commission  is  inclined  to  give  more  weight  to  actual  investm.ent. 

In  some  cases  accrued  depreciation  is  deducted.  For  land  usually 
original  cost  is  most  acceptable. 

Georgia;  Georgia  Railroad  Commission.  Ho  information. 

Hawaii ; Public  Utilities  Commission  of  Hawa-ii  first  orgs<n- 
ized  in  1913,  Has  jurisdiction  over  street  railwe«y,  electrical, 
water,  gas,  and  warehouse  utilities,  and  the  question  of  jurisdic- 
tion over  telephones  is  now  before  the  Suprem.e  Court.  The  Ccirfluis- 
sion  has  not  officially  adopted  any  basis  of  valuation,  but  fa,v- 
ors  origina.1  cost,  with  no  deduction  for  accrued  depreciation.  Ho 
formal  valuation  has  thus  far  been  m.ade  in  Hawaii,  and  the  q.ues~ 
tion  of  land  valuation  has  not  been  before  the  Commission, 

Idaho ; Public  Utilities  Commission  of  Idaho;  The  Commis- 
si on  was  first  organized  May  8,  1913,  and  has  jurisdiction  over 
steam,  street,  and  interurban  railroads,  and  electrical,  ivater, 
telephone,  gas,  heat,  and  warehouse  utilities.  For  determination 
of  rate  base  the  commission  follov^s  the  split-period  method,  v/hich 
really  is  a variation  of  actual  cost.  In  such  cases  accrued  de- 
preciation is  not  deducted.  Land  is  valued  upon  the  worth  of  sim- 
ilar adjacent  real  estate  at  the  present  time, 

Illinois ; Illinois  Commerce  Comrrdssion,  created  by  act  effect- 
ive July  1,  1921,  superseded  Illinois  Public  Utilities  Commission, 
organized  January  1,  1914.  Commission  ha,s  jurisdiction  over  steam, 
street,  and  interurban  railroads,  electrical,  water,  telephone, 
gas,  and  heating  utilities.  Commission  has  not  officially  adopted 
any  basis  of  valuation,  but  probably  favors  original  cost.  Accrued 
depreciation  is  deducted  from  reproduction  valuations.  Values  of 
Ipnd  are  based  upon  v/orths  of  similar  sdjacent  la.nd  at  present  time 


V 


75 


Indiana:  Public  Service  Commission  of  Indiana  was  organized 

in  1913*  The  Commission  has  jurisdiction  over  steam,  street,  and 
interurhp-n  railroads,  and  electrical,  water,  gas,  heating,  and 
warehouse  utilities.  Thus  far  it  has  adopted  no  particular  basis 
for  appraisals,  nor  has  it  given  preference  to  any.  Accrued  de~ 
precis.tion  is  deducted  when  deterrdning  the  rate  base.  Land  is 
valued  at  its  present  worth  as  nea.rly  as  sarnie  can  be  ascertained. 

Iowa:  Iowa  Railroad  Commission  T/as  first  organized  in  1878. 

Commission  ha.s  jurisdiction  over  steam  railroads  and  freight  rates 
on  interurban  railways.  It  has  neither  adopted  a particular  basis 
for  valuation  nor  given  preference  to  such.  Inasmuch  as  the  com- 
mission has  but  limited  jurisdiction,  there  is  little  need  for  ap- 
praisal data. 

Kanaas ; The  Kansas  Public  utilities  Comiiiission  he.s  been  suc- 
ceeded by  the  Court  of  industrial  Relations. 

Kentucky:  The  Kentucky  Railroad  Commission  has  no  jurisdic- 

tion over  utilities  other  than  steairi  railroads.  Inasmuch  as  the 
states  now  have  little  voice  in  the  control  over  steam  railroads, 
the  Kentucky  Commission  therefore  possesses  but  limited  powers, 

Louisiana:  The  Public  Service  Commission  of  Louisiana  was 
first  organized  in  1898.  It  has  control  over  steam,  interurban, 
and  street  railroads,  and  electrical,  water,  telephone,  gas,  and 
heating  utilities.  Ko  particular  basis  of  valuation  has  been  a- 
dopted  officially,  nor  is  preference  given  to  any.  The  statement 
is  made  that  the  Oomimission  has  had  no  occasion  to  appraise  any 
of  the  utility  properties  under  its  control. 

Maine : The  Public  Utilities  Commission  of  Maine  was  first 

orga.nized  in  1915.  It  has  jurisdiction  over  steam,  interurban, 
and  street  railroads,  and  electrical,  water,  telephone,  gas,  hea.t, 
and  warehouse  utilities.  The  Commission  has  not  officially  adopt- 
ed any  particular  basis  of  appraisal.  In  the  past  it  has  given 
preference  to  reproduction  cost  based  on  five-year  average  prices. 
Generally  accrued  depreciation  is  deducted  from  reproduction  cost. 
Present  value  of  land,  as  measured  by  that  of  adjacent  similar 
rea.1  estate,  is  used. 

Maryland:  The  Public  Service  Commission  of  Maryland  was  or- 

ganized in  1910.  It  has  jurisdiction  over  steam,  street,  and  in- 
terurban railroads,  and  electrical,  water,  telephone,  gas,  and 
heating  utilities.  The  Commission  has  not  adopted  any  particula,r 
method  of  appraisal,  although  it  now  is  making  one  of  the  property 
of  the  Consolidated  Gas  Electric  Light  and  Power  Company,  of  Balt- 
imore on  a basis  of  reproduction.  Definite  information  is  not 
given  concerning  depreciation  and  land  values. 


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MassaohusettB : The  Department  of  Puhlic  utilities  of  Massa- 

chusetts was  first  organized  in  1669,  thus  forming  one  of  the 
earliest  commissions.  It  has  jurisdiction  over  steam,  interurhan, 
and  street  railroads,  and  electrics,!,  water,  telephone,  and  gas 
utilities.  The  Commission  has  adopted  "the  honest,  original  in- 
vestment” as  the  "basis  of  valuation.  Accrued  depreciation  is  not 
deducted. 

Michigan ; No  information. 

Minnesota:  The  Hailroad  and  Warehouse  Conmiission  of  Minne- 

sota was  organized,  and  has  jurisdiction  over  steam,  street,  and 
interurhan  railroads,  and  telephone  and  ?/arehouse  utilities,  from 
printed  matter  furnished  hy  it  the  conclusion  is  drawn  that  it 
favors  actual  investment  as  a basis  for  rate  making. 

Mlssissinni : The  Mississippi  Railroad  Oor/imission  exercises 

jurisdiction  over  steam  railroads,  telephone  and  telegraph  comp- 
anies, and  to  a limited  extent  over  street  railway,  light,  heat, 
and  power  companies  serving  municipalities.  The  law  creating  and 
governing  the  activities  of  the  coirmission  has  been  declared  ob- 
solete and  a new  law  is  now  being  prepared  for  submission  to  the 
legislature.  The  oonmiission  has  adopted  no  basis  for  valuations, 

Missouri : The  Public  Service  Commission  of  Missouri  wa,s  or- 

ganized in  April,  1913,  It  exercises  a,uthority  over  street  and 
interurhan  railroads,  and  electric,  water,  telephone,  gas,  and 
heating  utilities.  The  Conmission  has  not  adopted  any  basis  of  axj- 
praisals,  but  has  given  preference  to  those  prepared  on  basis  of 
actual  cost.  Accrued  depreciation  is  deducted,  which  forms  an  ex-  ' 
oeption  to  the  practice  of  most  commissions  in  not  deducting  de- 
preciation when  appraisPvls  are  made  on  investment  cost.  Present 
value  of  land,  as  measured  by  worth  of  similar  adjacent  lands,  is 
used. 

Montana:  Wo  information: 

l^ebraska:  The  Nebraska  State  Railway  Commission  was  first 

organized  in  1907.  It  has  jurisdiction  over  steami  and  street  rail- 
roads and  telephone  and  telegraph  companies.  In  making  valuations 
the  Commission's  engineering  department  determines  the  original 
cost  and  the  original  cost  less  depreciation . As  nearly  as  I can 
determine  from  the  information  furnished,  the  Commission  values 
land  in  accordance  with  its  present  v/orth,  as  measured  by  similar 
ad j accent  real  estate. 


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Nevada ; The  Public  Service  Commission  of  Nevada  was  first 
organized  in  1907 } and  since  1911  has  had  jurisdiction  over  steam 
and  street  railroads,  express  companies,  private  oar  lines,  elec- 
tric, water,  and  gas  utilities,  and  automobile  common  carrier 
lines.  The  Commission  has  not  adopted  any  particular  basis  of  ap- 
praisal, and  ’’account  is  taken  of  accrued  depreciation  and  the 
present  value  of  adjacent  similar  lands”. 

New  Hampshire  r The  Public  Service  Commission  of  Ne?/  Hamp- 
shire was  organized  June  17,  1911.  It  has  jurisdiction  over  steam, 
interurban,  and  street  railroads,  and  electrical,  water,  telephone, 
and  gas  utilities,  ’’The  Cormiission  gives  a good  deal  of  weight 
to  the  actual  cost  of  construction  of  the  properties  when  it  is 
definitely  known;  also  to  reproduction  cost  and  reproduction  cost 
less  depreciation  when  the  actual  cost  is  not  known.  The  unit 
prices  used  in  valuation  are  usually  an  average  of  5 or  10  consec- 
utive years,  variously  selected  so  as  to  give  the  approxim.ate  cost 
of  the  property  in  the  Instant  case.” 

’’The  fair  value  as  above  determined  is  used  as  a rate  base. 

If  a sufficient  amount  has  been  earned  to  pay  a fair  return  on  tne 
prudent  investment  and  a fair  amount  for  accrued  depreciation, 
then  the  depreciated  value  is  used  as  the  depreciation  reserve  and 
the  depreciated  value  is  the  whole  property  and  the  depreciation 
reserve  should  take  care  of  itself.  Present  value  of  adjacent  and 
similar  land  is  considered,  but  the  land  may  have  a special  value 
for  the  purpose  for  which  it  is  to  be  used." 

New  Jersey;  No  Information. 

New  York:  Pirst  District:  The  Transit  Commission  of  New  York 

was  created  by  act  of  1921,  superseding  the  former  Public  Service 
Coiffiiission,  organized  in  1907,  To  the  present  time  the  new  Com- 
mission has  made  no  decisions,  but  is  now  engaged  in  working  out  a 
plan  of  readjustment  and  rehabilitation  of  railroad  properties  in 
the  greater  city  of  New  York, 

Second  District;  Public  Service  Commission  of  New  York  was 
organized  June  6,  1907  and  has  jurisdiction  over  steam  railroads 
and  to  a limited  extent  over  interurban  and  street  railways.  Also 
over  electrical,  gas,  water,  and  telephone  companies.  The  Commis- 
sion requires  appraisals  to  be  submitted  on  bvasis  of  original  cost 
where  it  can  be  determined  or  upon  estimated  original  cost  when 
the  records  showing  actual  cost  are  not  obtainable.  Accrued  de- 
preciation is  deducted.  Por  land  values  the  "actual  cost  plus 
consideration  of  appreciated  value  on  same.” 


78 


North  Carolina;  The  North  Carolina  Corporation  Commission 
was  organized  in  1899.  It  has  jurisdiction  over  street  and  inter— 
urban  railways,  and  elec'trical,  water,  telephone,  and  gas  utili- 
ties. Its  methods  oi  appraisals  are  prescibed  by  the  state  Reve- 
nues and  Machinery  Act,  which  practically  amounts  to  actual  cost 
less  accrued  depreciation. 

North  Dakota:  The  Board  of  Railroad  Commissioners  of  North 

Dakota  was  first  organized  in  1885,  at  which  time  it  had  jurisdic- 
tion over  what  is  now  both  North  and  South  Dakota,  The  present 
board  took  over  the  control  of  public  utilities  in  1919,  and  now 
exercises  jurisdiction  over  steam,  street,  and  interurban  rail- 
roads, and  electrical,  water,  telephone,  gas,  and  heat  utilities, 
and  limited  authority  over  warehouses.  The  Commission  has  adopted 
a so-called  historical  cost  for  rate  making  purposes.  Accrued  de- 
preciation is  not  deducted  from  the  historical  cost.  Both  the 
historical  and  the  peesent  costs  of  land  are  submitted  to  the  Com- 
mission for  such  use  as  it  desires  to  make, 

Ohio ; The  Public  Utilities  Commission  of  Ohio  was  organised 
August  9,  1913,  succeeding  the  Public  Service  Commission,  The 
first  public  regulation  of  utilities  in  Ohio  was  enacted  April  5, 
1867,  thus  forming  the  oldest  Commission  of  which  I have  record. 

The  Coimrdssion  has  jurisdiction  over  steam  and  interurban  rail- 
ways, telephone,  telegraph,  electric,  water,  heating,  artificial 
and  natural  gas  companies,  and  package  carrying  companies.  Since 
March  29,  1917,  the  Corrmiission  has  used  for  determining  the  rate 
base  the  fair  price  obtaining  over  the  five-year  period  preceding 
the  date  of  the  appraisal.  Effective  January  23,  1922,  the  basis 
of  pricing  will  be  changed  to  reproduction  as  of  the  date  of  the 
inquiry.  Accrued  depreciation  is  deducted.  Land  is  valued  upon 
the  present  worth  of  adjacent  similar  real  estate, 

Oklahoma:  Corporation  Conmiission  of  Oklahoma:  No  informatior 

Oregon : No  information, 

Pennsylvania:  The  Public  Service  Coirmiission  of  Pennsylvania 

was  created  in  1914,  succeeding  the  Pennsylvania  Railroad  Commis- 
sion which  had  been  in  existence  for  a number  of  years.  The  Com- 
mission has  jurisdiction  over  steam,  interurban,  and  street  rail- 
roads, electric,  gas,  telephone,  water,  telegraph  comx^anies.  It 
has  not  adopted  any  particular  basis  for  appraisals.  In  the  pre- 
sentation of  rate  oases  the  Coimraission  inVvariably  has  before  it 
both  the  reproduction  cost  and  the  reproduction  cost  less  accrued 
depreciation.  Present  vs-lue  of  land,  as  determined  by  the  worth 
of  adjacent  similar  lands,  is  used. 


Rhode  Island:  The  Puhllo  Utilities  Commission  of  Rhode  Is- 

land was  organized  in  May,  1912,  and  has  oontrol  over  all  the  so- 
called  public  utilities,  except  water  companies  owned  and  operated 
by  municipalities.  As  determined  from  the  report  of  the  Special 
Commission  appointed  by  the  Governor  to  investigate  the  affairs  of 
the  Rhode  Island  Company,  it  appears  to  me  the  Commission  takes 
cognizance  of  the  cost  of  reproduction  new  and  the  cost  of  repro- 
duction less  accrued  depreciation.  Land  values  appear  to  be  based 
upon  the  present  worth  of  adjacent  similar  real  estate, 

South  Carolina:  South  Carolina  Railroad  Commission.  ITo  in- 

formation. 

South  Dakota;  The  Bop.rd  of  Railroad  Commissioners  was  orig- 
inally created  in  1885,  as  stated  under  ’MTorth  Dakota".  The  pres- 
ent commission  exercises  jurisdiction  over  steam  railroads  and 
telephone  and  warehouse  companies.  The  Commission  has  not  offici- 
ally adopted  any  basis  of  valuation,  but  favors  cost  of  reproduc- 
tion-^  deducting  accrued  depreciation.  Dor  land  the  present  market 
worth  is  used. 

Tennessee : The  Tennessee  Railroad  Commission  wa,s  created  in 

1897  with  jurisdiction  over  steam  railroads  only.  In  1919  there 
was  created  the  Railroad  p.nd  Public  Utilities  Commission,  with 
authority  over  all  public  utilities  not  municipally  owned,  such  as 
street  and  interurba,n  railroads,  electrical,  water,  telephone,  gPvS, 
and  heating  compp^nies.  In  fixing  a value  the  Commission  is  con- 
trolled by  the  principles  laid  down  by  the  courts,  and  ascertains 
the  original  cost  and  the  cost  of  reproduction.  Accrued  deprecia- 
tion is  not  deducted  when  determdning  rate  base.  Lands  are  valued 
on  the  basis  of  the  worth  of  similar  adjacent  rep.l  estate, 

Texp.s : The  Railroad  Coumiission  of  Texas  was  firt  organized 

in  1393.  It  has  jurisdiction  over  steaim  railroads,  oil  pipe  lines, 
and  natural  ga.s  utilities,  the  latter  authority  being  conferred  in 
1920,  The  Commission  has  p.dopted  no  definite  basis  of  valuation. 

Mr.  R.  D.  Parker,  chief  engineer  of  the  Coinraission  states:  "The 
writer  is  inclined  to  the  belief  that  the  value  which  nearest  ap- 
proaches to  justice  to  all  concerned  is  that  value  which  nearest 
approaches  the  legitimate  actual  investment,  that  is,  the  money 
which  has  gone  into  the  creation  of  the  property.  The  courts  do 
not  sustain  such  judgiment  if  such  value  does  not  represent  the 
’value  at  the  time  of  the  inquiry’;  but  what  the  vp.lue  p.t  the  time 
of  the  in(iuiry  is  is  not  defined."  ^ "The  cost  to  reproduce 

the  property  is  a fluctuating  base,  rising  and  falling  with  the 
costs  of  labor  and  materials;  yet  it  is  advocated  ?*s  the  best  meas- 
ure of  the  value  at  the  time  of  the  inquiry.  A rate  should  be 
reasohably  stable  and  it  cannot  be  so  and  follow  a fluctuating 
base," 


80 


Utah ; The  Public  Utilities  Gonmiission  of  Utah  was  organized 
April  1,  1917.  It  has  jurisdiction  over  steam,  interurhan,  and 
street  railroads,  and  electrical,  water,  telephone,  gas,  heating, 
and  warehouse  utilities.  The  Oominission  has  not  officially  adopt- 
ed any  particular  basis  of  appraisals,  nor  does  it  favor  such.  Ac- 
crued depreciation  is  deducted  in  determining  the  rate  base.  Land 
is  appraised  on  the  basis  of  the  fair  present  market  value  of  ad- 
jacent similar  lands. 

Vermont : The  Vermont  Public  Service  Oonmiission  was  first  or- 

ganized in  1908.  It  has  jurisdiction  over  steam,  interurban,  and 
street  railroads,  and  electrical,  water,  telephone,  and  gas  utili- 
ties. The  Commission  has  not  adopted  any  particular  basis  of  ap- 
pr  sal,  nor  does  it  favor  such.  Accrued  depreciation  is  deducted 
in  determining  the  rate  base.  The  value  of  land  as  compared  with 
similar  adjacent  real  estate  is  considered  as  one  of  the  elements 
of  the  worth  of  land. 

Virginia;  The  State  Corporation  Commission  of  Virginia  was 
organized  March  1,  1908.  It  has  control  over  steam,  interurban, 
and  street  railroads,  except  where  city  charters  provide  for  local 
control  of  the  latter.  Control  is  also  exercised  over  water  comp- 
anies other  than  those  municipally  ovvned,  and  over  telephone,  gas, 
and  heating  utilities.  Por  determining  the  rate  base  the  Ooirmis- 
sion  uses  principally  appraisals  based  on  the  cost  of  reproduction 
at  pre-war  prices,  deducting  accrued  depreciation.  Land  is  valued 
on  the  basis  of  the  fair  present  worth  of  similar  adjacent  lands. 

Washington:  The  Department  of  Public  Works  of  Washington  was 

created  in  1921,  succeeding  the  Public  Service  Commission,  organ- 
ized in  1911,  which,  in  turn,  superseded  the  Railroad  Commission, 
created  in  1905,  The  Commission  has  jurisdiction  over  steam,  in- 
terurban, and  street  railroads,  electrical,  water,  telephone,  gas, 
and  warehouse  utilities,  except  those  municipally  owned.  The  De- 
partment has  never  officially  adopted  any  particular  basis  of  ap- 
praisal, but  it  is  the  practice  of  its  engineering  and  auditing 
section  to  submit  [a.)  the  cost  of  the  property  as  shown  by  the 
company  records,  (b)  estimated  cost  of  construction,  determined  by 
the  split  inventory  method,  Co)  estimated  cost  of  reproduction,  us- 
ing prices  averaged  over  a reasonable  construction  period,  or  as 
of  the  date  of  the  report,  and  Cd)  cost  of  reproduction  less  theor- 
etical accrued  depreciation.  The  Department  does  not  deduct  ac- 
crued depreciation  in  fixing  the  rate  base.  "Ordinarily  the  rate 
base  fixed  by  this  Department  is  very  close  to  the  estimated  cost 
of  construction,  with  a reasonable  allowance  for  intangible  wle- 
ments,  such  as  water  rights,  development  costs,  etc."  Value  of 
land  is  determined  by  value  of  adjacent  similar  la.nds,  at  least  to 
a large  extent . 


81 


• West  Virginia:  Ho  information. 

WlsoonBin;  The  Wisconsin  Railroad  Commission  was  organized 
in  1905  with  control  over  railroad,  express,  Pullman,  and  tele- 
graph companies . In  1907  the  law  was  changed  so  as^o  give  juris- 
diction over  the  foregoing  and  also  telephone,  electric,  water, 
street  and  interurhan  railways,  gas,  heating,  and  toll  bridge  util- 
ities, The  control  over  gas,  electric,  water,  telephone,  heating, 
and  toll  bridge  utilities  extends  alike  over  municipally  and  priv- 
ately owned.  The  Commission  has  not  officially  adopted  any  par- 
ticular basis  of  appraisal,  ”In  general,  however,  it  uses  a ba^sis 
designed  to  reflect  as  nearly  as  possible  the  actual  investment. 
During  recent  years  it  has  used  a ten-year  average  of  prices  prior 
to  the  war  for  property  which  was  in  existence  s.t  the  beginning 
of  the  wpj?  and  actual  prices  so  far  as  determinable  for  property 
put  in  during  the  war,”  Accrued  depreciation  is  not  deducted  in 
determining  the  rate  base  where  properties  have  been  properly  main- 
tained, Land  is  valued  on  its  present  day  value  subject  to  the 
rule  in  the  Minnesota  rate  cases, 

Wyoming;  The  Public  Service  Coinmission  of  Wyoming  was  organ- 
ized April  1,  1915,  It  has  jurisdiction  over  steam  street,  and  in- 
terurban  railroads,  and  electrical,  water,  telephone,  gas,  and 
heating  utilities.  The  Commission  has  not  adopted  any  particular 
basis  of  valuation,  and  does  not  favor  such.  Accrued  depreciation 
is  not  deducted  in  determining  the  rate  base.  Land  is  valued  at 
its  actual  worth,  as  determined  by  appraisement  or  otherwise. 


-oOo- 


Based  upon  the  information  contained  in  the  foregoing  synop- 
ses, it  is  seen  that  public  regulation  of  utilities  began  in  Ohio 
in  1867,  closely  followed  by  the  enactment  of  somewhat  similar 
legislation  in  Massachusetts  in  1369,  Then  followed  a lull  until 
1878  when  the  Iowa  Commission  was  organized,  Prom  that  time  on 
the  growth  of  the  idea  has  been  comparatively  constant,  both  in 
the  number  of  commissions  and  the  extent  of  their  powers.  The 
jurisdiction  of  the  early  cormnissions  was  confined  practically  to 
steam  railroads  and  telegraph  lines,  but  at  the  present  time  con— 


88 

trol  is  exercised  over  the  activities  of  practically  all  utilities, 
as  instanced  hy  the  Wisconsin,  Illinois,  California,  and  other  com- 
missions. However,  a numher  of  them  even  now  have  hut  little  au- 
thority, inasmuch  as  their  jurisdiction  formerly  extended  mainly 
over  the  steam  railroads.  By  reason  of  Federal  legislation  and 
decisions  of  the  United  States  Supreme  Court,  the  state  comriiissions 
now  have  hut  slight  authority  over  the  steam  railroads,  and,  inas- 
much as  the  legislatures  of  many  states  have  not  seen  fit  to  confer 
the  necessary  authority  over  other  utilities,  the  commissions  in 
those  states  are  extremely  limited  in  their  functions.  This  is 
particularly  true  in  the  South,  as  represented  hy  Mississippi,  Tex- 
as, Kentucky,  and  Florida.  In  Kansas  the  Utilities  Commission 
was  abolished  and  superseded  hy  the  Court  of  industrial  Helations, 
and  this  organization  has  been  the  storm  center  of  labor  agitators 
and  others  during  the  past  year.  In  many  of  the  states  the  salar- 
ies paid  the  members  of  the  commissions  are  so  siriall  as  not  to  at- 
tract competent  men,  with  conseq.uent  loss  to  the  public  and  the 
utilities,  and  instances  could  be  given  of  where  employes  of  the 
commissions  are  paid  more  than  are  members  of  the  organization. 

Perusal  of  the  synopses  shows  a wide  diversity  of  opinion  con- 
cerning the  proper  basis  for  race  making  purposes , and  in  order  to 
enable  a somewhat  q.uicker  grasp  of  this  phase  of  the  matter  than 
can  be  given  by  the  summaries  above,  there  ha,s  been  prepared  the 
following  tabulation,  briefly  showing,  as  nearly  as  possible  in 
the  limited  space  available,  the  attitude  of  the  various  comirds- 
sions  on  this  important  question: 


83 


1. 


State 

• 

Cre- 

,ated 

Alabama 

Arizona 

1912 

Arkansas 

1921 

California 

1897 

Colorado 

1885 

Connecticut 

Delaware 

D.of  Columbi£ 

5.  1913 

Florida 

1891 

Georgia 

Hawaii 

1913 

Idaho 

1913 

Illinois 

1914 

Indiana 

1913 

Iowa 

1878 

Kansas 

1921 

Kentucky 

Louisiana 

1898 

Maine 

1915 

Maryland 

1910 

Massachusetts  1869 

Michigan 

Minnesata 

Mississippi 

Missouri 

1913 

Montana 

Hebraska 

1907 

Hevada 

1907 

Hew  Hampshire  1911 

Hew  Jersey 

Hew  York 

1921 

II  11 

1907 

Horth  Carolinal899 

Horth  Dakota 

1885 

Ohio 

1867 

Oklahoma 

Oregon 

Pennsylvpjiia 

1914 

Rhode  Island 

1912 

S.  Carolina 

S.  Dakota 

1885 

Tennessee 

1919 

Texas 

1893 

Utah 

1917 

Vermon^r 

1908 

Virginia 

1908 

Washington 

1905 

W,  Virginia 

Wisconsin 

1905 

Wyoming 

1915 

Coimnission  

Basis  of  Valuation  for  Rate  Making 

^To  inforriation 

Cost  of  reproduction  less  depreciation  favored. 

Has  little  to  do  with  utility  rates 

Depreciated  reproduction  value 

Generally  seeks  undepreciated  original  cost 

ITo  information 

ITo  regulatory  commission 

Appears  to  favor  depreciated  reproduction  cost 
Prefers  actual  investment 
Ho  information 

Pavors  undepreciR,ted  original  cost 

!l  !»  II  II 

Appears  to  favor  undepreciated  actual  cost; 

Has  shown  no  preference;  deducts  depreciation 
Ho  Jurisdiction  over  utilities  other  than  R.R, 
Court  of  industrial  Relations 
Ho  Jurisdiction  over  utilities 
Ho  preference;  has  not  valued  any  properties 
Prefers  depreciated  reprod’n  on  5~year  average 
How  making  valuation  on  reproduction  hasis 
Has  adopted  undepreciated  "honest  investment" 

Ho  information 

Appears  to  favor  actual  investment 
Has  hut  little  Jurisdiction  over  utilities 
Prefers  depreciated  actual  cost 
Ho  information 

Commission  engineers  find  depreciated  actual  in 

Ho  particular  preference 

Gives  weight  to  actual  cost 

Ho  information 

Has  made  no  valuations 

Req.uires  valuations  of  property  on  original  cos 
Practically  eq.uivB,lent  to  depreciated  actual  " 
Has  adopted  "historical  cost"  undepreciated 
Depreciated  5-year  average  costs 
Ho  information 

II  It 

Req.uires  both  actual  and  reproduction  costs 
Appears  to  favor  depreciated  reproduction  cost 
Ho  information 

Favors  depreciated  reproduction  cost 
Appears  to  favor  original  cost 
Favors  actual  investment 

Appears  to  favor  depreciated  reproduction  cost 

It  II  II  It  « 

Favors  reproduction  on  pre-war  prices 

Kate  base  usually  near  undepreciated  actual  " 

Ho  information 

Favors  undepreciated  actual  investment 
Ho  particular  basis  favored 


84 


The  tahulatlon  on  page  83  contains  50  names,  and  from  this 
summaary  and  the  discussion  beginning  on  page  73  general  conclus- 
ions may  he  drawn  as  follows: 

1.  The  earliest  attempt  at  regulation  was  the  enactment  in 
Ohio  in  1867  of  a law  to  control  railroads  and  telegraphs. 

3.  All  states  except  Delaware  have  a regulatory  cormiassion 
with  greater  or  less  jurisdiction. 

3.  10  states  furnished  no  information  in  response  to  my  re- 

q.uest,  Alabama,  Connecticut,  Georgia,  Michigan,  Montana,  Hew 

Jersey,  Oklahoma,  Oregon,  South  Carolina,  and  V/est  Virginia. 

4.  8 state  oonmiissions  have  practically  no  jurisdiction 
over  the  rates  of  utilities,  viz.,  Arka,nsas,  Florida,  Iowa,  Ken- 
tucky, Mississippi,  Hebraska,  South  Dakota,  and  Texas. 

5.  Wisconsin  appears  to  have  conferred  upon  its  commission 
the  broadest  powers  possessed  by  any.  However,  this  statement 
cannot  be  made  with  certainty  owing  to  the  fact  that  some  commis- 
sions did  not  answer  my  req.uest,  and  others  may  have  broader  pow- 
ers than  disclosed  by  the  answers  to  the  q.uestionnaire.  Person- 
ally I know  of  no  other  possessing  powers  over  as  many  forms  of 
utilities  and  also  including  those  municipally  owned.  Wisconsin 
is  popularly  considered  a high-grade  commission. 

6.  Two  states  only  have  adopted  a basis  of  valuation  for 
rate  making  purposes.  Massachusetts  has  adopted  the  "honest,  o- 
riginal  investment",  and  Perth  Dakota  has  adopted  the  undepreci- 
ated historical  reproduction  cost. 

7.  Pine  states  appear  to  favor  the  cost  of  reproduction  less 
accrued  depreciation,  viz.,  Arizona,  California,  District  of  Oo- 
lumbia,  Maryland,  Rhode  Island,  South  Dakota,  Utah,  Vermont,  and 
Virginia.  This  statement  cannot  be  made  with  certainty  because 
there  are  a number  of  modifications  brought  about  by  various  con- 
siderations in  particular  cases,  so  that  in  some  instances  the 
some  commiission  may  appear  to  favor  this  basis,  while  in  other 
cases  some  other  basis  may  be  considered  best.  However,  the  above 
is  as  near  as  I can  come  to  segregating  the  preference. 

8.  Two  states  prefer  depreciated  reproduction  cost  based 
upon  five-year  average  prices,  viz.,  Maine  and  Ohio. 

9.  15  states  or  commiission  appear  to  strongly  favor  the  un- 


85 


depreciated  original  cost  of  the  property,  or  its  eq.uivalent,  as 
the  proper  "basis  of  rate  making.  These  states  are  Colorado,  Flor- 
idPv,  Hawaii,  Idaho,  Illinois,  liassachusetts , Minnesota,  ITehraska, 
Hew  IlaTupshire,  Hew  York  (up-stp.te ) , Horth  Dakota,  Tennessee,  Tex- 
as, Washington,  and  Wisconsin,  This  statement  cannot  he  made  with 
certainty  for  the  reasons  given  under  (7)  on  preceding  page,  hut 
it  appears  to  coincide  with  the  facts  as  nearly  as  I can  determine 
from  the  facts  submitted  to  me. 

10,  Two  states  a,ppear  to  favor  depreciated  original  cost, 
viz,,  Missouri  and  Horth  Carolina.  The  latter  is  accounted  for 
hy  the  fact  that  the  valuations  are  largely  for  taxa-tion  purposes, 
8.S  req.uired  under  the  Revenues  a,nd  Machinery  Act. 

11.  Hive  states  appear  to  have  no  preferences  in  the  matter, 
viz.,  Indiana,  Louisiana,  Hevada,  Pennsylvania,  and  Wyoming.  Per- 
haps a better  statement  of  this  would  he  that  these  coriimissions 
consider  valuations  on  any  basis. 

18.  In  general,  deprecis,tion  is  deducted  hy  the  commissions 
when  the  valuations  are  based  upon  reproduction  cost.  When  the 
rate  base  is  determined  by  the  actual  investment,  depreciation  is 
cormionly  not  deducted.  "Exceptions  to  this  rule  appear  to  be  the 
sates  of  Missouri  and  Horth  Carolina,  as  shown  in  ilO)  above, 

13.  Without  exception,  the  conmiissions  accept  the  value  of 
lands  as  that  measured  by  the  fp.ir  present  worth  of  similar  ad- 
jacent land.  This  may  have  been  determined  in  various  ways,  such 
as  ox)inion  values  of  local  persons  familiar  vjith  such  values,  or 
by  comparison  of  transfer  values  in  the  locality,  or  by  other 
method.  As  nearly  as  can  be  determined  from  the  information  furn- 
ished me,  it  probably  is  not  too  broad  a statement  to  say  that 
this  value  is  fixed  upon  in  compliance  with  the  decision  of  the 
United  States  Supreme  Court  in  the  Minnesota  Rate  cases. 

14,  In  one  state,  Kansas,  the  regulatory  comrrdssion  has  been 
succeeded  by  the  Court  of  Industrial  Relations,  and  I have  before 
me  no  statement  as  to  the  authority  of  the  latter  in  the  wa.y  of 
rate  making. 

from  the  foregoing  it  appears  that  the  state  regulatory  com- 
missions overwhelmingly  favor  the  undepreciated  actual  cost  of  a 
utility  property  as  the  proper  amount  for  the  rate  base.  This 
statement  is,  of  course,  miodified  to  some  extent  by  loca-1  condi- 
tions in  particular  cases,  but  appea,rs  warranted  as  a genera-l  sum- 
marization of  the  miatter.  Further  discussion  will  be  made  in  sub- 


86 


su'bBeq.uent  paragraphs  dealing  with  the  desirability  of  a single 
stfindard  for  rate  making  value . 

True  Rate  Base:  From  such  experience  as  he  has  had,  the 

writer  has  reached  very  definite  conclusions  concerning  the  true 
hasie  of  valuation  for  rate  making  purposes,  which,  in  his  opinion, 
is  the  undepreciated  actual  cost  of  the  essential  property  used  in 
supi)lying  the  service.  In  the  following  pages,  therefore,  attempt 
will  he  made  to  make  clear  the  reasons  for  this  opinion,  both  by 
showing  certain  advantages  possessed  by  this  basis  and  by  setting 
forth  various  disadvantages  of  other  methods. 

In  assuming  the  above  position  concerning  the  true  basis  of 
rate  marking,  I am,  of  course,  well  aware  that  the  method  is  not  in 
favor  with  many  utility  operators  and  even  with  many  courts  and 
corrjrdssions . The  position  is  tp^ken  on  principle,  however,  regard- 
less of  the  beliefs  of  others,  and  independent  of  the  q.uestion  as 
to  how  the  return  will  be  affected  by  this  basis  of  valuation.  I 
am  far  from  one  of  those  who  believe  that  public  regulation  is  for 
the  purpose  of  starving  an  utility  to  death.  Such  procedure  is 
not  only  morally  wrong,  but  is  even  worse,  for  it  is  economic  sui- 
cide. I cannot  bring  myself  to  believe  that  one  group  of  citizens 
can  be  made  to  suffer  financially,  or  otherwise,  by  another  without 
injustice  to  the  entire  body  politic.  A case  in  point  is  the  com- 
mon union  Isbor  attitude  towards  the  remainder  of  the  public.  By 
means  of  combination,  coupled  with  intimidation  or  actual  destruc- 
tion of  property,  organized  labor  has  so  raised  costs  of  all  class- 
es of  articles  p-s  to  bring  suffering  upon  the  general  mass  of  the 


87 

citizenry.  In  so  doing  they  also  have  injured  themselves,  as  can 
he  readily  detected  in  the  changed  attitude  of  the  public  towards 
labor  unions.  As  these  have  been  conducted  in  the  pa,st  in  Chicago 
they  are  little  better  than  holdup  men,  and  the  railroad  brother- 
hoods have  given  two  or  three  striking  exaiuples  of  the  same  tenden- 
cies during  the  past  four  years. 

In  considering  particular  merits  or  demerits  of  various  meth- 
ods for  determining  the  rate  base,  it  is  well  to  point  out  that 
such  base  is  determined  from  consideration  of  appraisals  of  the 
property  mjide  upon  one  or  more  well  recognized  bases,  generally 
the  actual  cost  or  some  form  of  reproduction  method.  And  looking 
at  the  determination  of  the  rate  base  in  this  light,  it  is  obvious 
that,  in  every  case,  the  one  and  only  aim  of  the  appraisal  is  to 
find  the  cost  of  the  property.  That  is,  no  matter  what  the  basis 
of  the  appraisal,  its  ultimate  goal  is  some  cost  of  the  property, 
and  in  the  following  discussion  this  vital  fact  must  be  kept  clear- 
ly in. mind. 

How,  in  the  determination  of  the  re-production  cost  of  a prop- 
erty it  is  very  clear  that  the  cost  which  is  determined  is  merely 
the  estimated  cost  which  is  found  through  particular  assumptions, 
such  as  the  time  at  which  the  estimate  is  made,  the  prices  tha.t  are 
used  in  the  estimate,  and  the  theory  upon  which  the  work  shall  be 
performed.  All  of  these  may  have  little  or  no  relation  to  the  ac- 
tual cost  of  the  work,  the  actual  time  at  which  the  plant  was  con- 
structed, or  the  actual  way  in  which  it  was  built.  In  no  other 
affair  of  life  is  the  theoretical  substituted  for  the  actual  when 


88 

it  is  at  all  possi'ble  to  determine  the  latter.  Uo  man  huilding  a 
house  could  he  persuaded  that  the  estimate  of  a,  contractor  is  as 
good  or  reliable  as  is  the  signed  contract  for  the  construction  of 
the  house  at  a specified  price.  In  the  one  case  he  has  nothing 
ux>on  which  to  predicate  his  financial  req.uirements  in  the  matter, 
while  in  the  latter  case  he  feels  secure  in  going  ahead  in  the  full 
kno?#ledge  that  he  will  arrive  at  a definite  place.  It  is  a well- 
known  fact  tha,t  under  a given  set  of  conditions  no  two  men  will 
estimate  exactly  alike,  and  it  is  a freq^uent  condition  to  find  the 
estimates  of  several  men  upon  the  same  structure  to  vary  hy  from 
40  percent  to  even  100  percent,  while  10  percent  is  commonly  con- 
sidered rather  close  agreeement.  In  the  face  of  such  conditions 
how  can  it  he  held  that  reproduction  cost  forms  even  an  approach 
to  a desirable  basis  of  valuation? 

Reproduction  costs  commonly  are  much  higher  than  actual  ex- 
penditures. in  making  up  a bid  for  the  construction  of  a proposed 
building,  the  contractor  must  protect  himself  by  making  his  price 
high  enough  to  care  for  any  contingencies  that  may  arise.  In  the 
same  way,  an  engineer  marking  an  estimate  of  the  cost  of  reproduc- 
tion of  a property  must  make  it  sufficiently  high  that  all  elements 
of  expense  shall  be  properly  taken  care  of.  In  so  doing  the  engi- 
neer may  be  actuated  by  the  highest  motives,  and  it  is  no  reflec- 
tion upon  the  profession  that  frequently  different  engineers  m.ay 
greatly  differ  in  their  estimates  of  the  probable  cost  of  a prop- 
erty. For,  in  the  final  analysis,  it  is  a matter  of  skill  and 


89 

judgment  on  the  part  of  the  appraiser,  and  these  two  qualities  are 
as  variant  in  engineers  as  in  plumbers. 

The  sacrifice  of  the  owners  of  a public  utility  property  for 
the  benefit  of  the  public  is  directly  measured  by  their  actual  ex- 
penditures therefor,  and,  so  far  as  I am  aware,  it  can  be  determ- 
ined by  no  other  standard.  Reproduction  "value"  cannot  measure 
it,  for  there  is  little  or  no  relation  between  the  two.  The  out- 
lay which  the  company  has  mde  for  the  benefit  of  the  public  is  a 
fixed  amount  at  any  given  time,  while  the  cost  of  reproduction  va- 
ries with  the  time  at  which  it  is  made  and  with  the  person  who  per-^ 
forms  the  work,  I think  it  must  be  admitted  that  the  owners  of 
the  property  are  entitled  to  a reward  that  is  in  proportion  to  the 
sacrifices  they  have  made,  hence  there  appears  a direct  connection 
between  that  reward  and  the  actual  investment  in  the  plant. 

Costs  determined  upon  a reproduction  basis  other  than  histor- 
ical are  subject  to  continual  changes,  for  logically  they  must  vary 
with  the  time  of  the  appraisal,  for  it  would  be  no  more  than  a co- 
incidence to  have  the  market  prices  of  all  the  articles  in  a com- 
posite plant  the  same  at  two  different  times.  All  are  farniliar 
with  the  rapid  price  fluctuations  that  have  taken  place  during  the 
past  five  years,  and  these  changes  are  of  necessity  reflected  in 
the  appraisal  of  any  property  made  on  a reproduction  basis,  wheth- 
er prices  be  assumed  as  at  the  time  of  the  appraisal,  or  averages 
during  the  preceding  five  or  ten  years,  it  is  true  that,  when  av- 
erage costs  are  assumed,  the  fluctuation  is  much  less,  and  in  that 


1 


90 


lies  the  admitted  superiority  of  such  hasis  over  that  of  reproduc- 
tion at  market  prices  prevailing  at  the  time  of  the  inq.uiry.  If, 
then,  the  greater  freedom  from  fluctuations  is  afforded  hy  average 
prices,  it  appears  logical  to  assume  that  a hasis  which  is  still 
freer  from  such  fluctuations  must  he  more  desirable.  To  me  it 
seems  clear  that  such  is  the  case,  and  it  req.uires  no  argument  to 
prove  that  actual  cost  is  less  affected  hy  market  fluctuations  than 
are  other  bases.  This  is  so  for  the  reason  that  only  a comparative-’ 
ly  small  portion  of  a-  plant  is  installed  in  any  particular  year, 
and,  while  purchases  made  during  any  given  time  undoubtedly  reflect 
market  conditions,  nevertheless  these  changes  are  not  applied  to 
such  large  portions  of  the  property  as  they  are  when  it  is  valued 
on  a reproduction  basis.  Further,  it  is  a coimnon  practice  among 
utilities  companies  to  minimize  their  purchases  during  periods  of 
high  market  prices  and  to  expand  when  costs  decrease,  and  this  fact 
also  has  a noticeable  effect  in  lessening  the  variations  between 
the  actual  and  reproduction  costs  of  a property  at  a specified  time, 
Under  modern  theories  of  rate  making,  among  the  earnings  to 
which  a public  utility  enterprise  is  entitled,  is  a reasonable  re- 
turn upon  the  "fair  value"  of  the  property.  It  is  evident  that  if 
by  fair  value  we  mean  reproduction  cost,  then  the  "value"  of  the 
property  will  vary  from  time  to  time,  or  even  from  day  to  day,  as 
the  market  changes.  Since  rates  should  be  no  more  than  will  afford 
a reasonable  return,  it  then  is  equally  plain  that  rates  should 


91 


vary  with  the  value  of  the  property.  As  a matter  of  practical  hus- 
inees,  rates  should  he  as  suable  as  possible,  for  changes  in  them 
cause  needless  confusion  and  irritation  to  the  consumiers.  Inasmuch 
as  additions  and  betterments  are  made  gradually,  and  usually  are 
not  made  until  clearly  req.uired  by  the  needs  of  the  business  and 
therefore  ’’carry  themselves”  from  the  beginning,  it  seems  not  to 
need  argument  to  show  that  a stable  rate  base  is  highly  desirable, 
and  that  this  economic  desideratm  is  best  afforded  by  the  actual 
investment . 

In  the  usual  application  of  theories  to  practical  affairs  in 
life,  it  seems  clea,r  that  assumptions  made  in  the  use  of  the  theor- 
y must  be  consistent  throughout.  If  this  test  be  applied  to  the 
determination  of  the  reproduction  cost,  other  than  historical,  of 
a property,  it  commonly  will  be  found  that  consistency  is  not  one 
of  the  jewels  which  will  be  found.  Suppose,  for  exam.ple,  we  are 
valuing  the  property  of  a steam  railroad  company  on  a reproduction 
basis,  assuming  conditions  as  they  exist  at  present.  When  the  i- 
tern  of  clearing  and  grubbing  is  considered,  for  instance,  we  must 
ascertain  the  cost  of  this  work  only  through  lands  that  now  are 
timbered.  But  it  usually  happens  that  at  the  time  the  road  was 
built  it  was  constructed  through  many  tracts  of  timber  that  since 
have  been  removed.  Under  our  assumptions,  no  credit  can  be  given 
for  the  expenditures  actually  made  by  the  road  for  cutting  that 
timber.  But  if  credit  is  not  given  for  this  work,  which  was  ab- 
solutely necessary,  we  cannot  but  have  the  feeling  that  the  car- 


98 

rier  has  "been  deprived  of  a portion  of  the  money  that  rightfully 
has  gone  into  its  property,  and  no  argument,  however  specious,  can 
convince  us  otherwise.  The  thought  is  there  and  '.111  not  down  that 
the  railroad  is  fairly  entitled  to  a return  on  the  expenditures 
it  thus  made  for  clearing  and  gruhhing,  and  the  appraiser  at  once 
is  tempted  to  change  the  assumptions  so  as  to  permit  the  inclusion 
of  these  costs. 

Come  now  to  the  same  railroad  where  it  now  passes  through  a 
large  city,  with  costly  huildings  at  frequent  intervals  along  its 
right  of  way.  These  structures  were  not  there  v/hen  the  road  was 
constructed,  in  fact,  the  land  was  perhaps  raw  prairie.  What,  then 
is  the  cost  of  constructing  the  road  through  this  territory?  If  we 
stick  to  our  assumptions  that  it  is  the  cost  of  reproducing  the 
property  under  present  conditions  we  are  forced  to  determine  v/hat 
it  would  cost  to  cut  a right  of  way  through  this  costly  land.  This 
might  he  a fabulous  sum,  even  if  it  can  he  conceived  that  the  road 
could  he  constructed  at  all  under  the  conditions  now  existing.  Us- 
ually it  could  not,  for,  as  a practical  matter,  the  cost  would  he 
prohibitive,  even  if  the  road  had  the  power  of  eminent  domain  un- 
der the  circumstances,  which  it  usually  does  not.  To  include  any 
such  enormous  sums  in  the  value  of  the  property  would  he  tanta- 
mount to  forcing  the  public  to  pay  rates  which  might  he  highly  un- 
rep,sonahle,  and  is  as  repugnant  to  ordinary,  right-thinking  men, 
as  would  he  the  deprivation  of  the  road  of  a return  upon  the  money 
actually  spent  for  clearing  and  gruhhing,  mentioned  in  the  above 


93 


paragraph . 

Speaking  of  this  method  of  valuation,  the  United  States  Su- 
prerae  Court  stated: 

"The  cost  of  reproduction  is  of  service  in  ascertaining  t|ie 
present  value  of  the  plant,  when  it  is  reasonably  applied  and  v/hen 
the  cost  of  reproducing  the  property  may  he  ascertained  with  a 
proper  degree  of  certainty.  But  it  does  not  justify  the  acceptance 
of  results  which  depend  upon  mere  conjecture.”  (Minnesota  Kate 
cases,  230  U.S,  352,452). 

Consider  also  the  case  of  a street  railway  in  which  practical- 
ly all  its  tracks  are  now  in  paving  and  have  been  for  several 
years.  Also,  that  when  this  railroad  was  constructed  it  was  nec- 
essary to  remove  a considerable  hill  in  order  to  secure  a practi«^ 
cable  grade.  If  we  assume  the  road  to  be  reproduced  at  the  pres- 
ent time  under  existing  conditions,  the  cost  of  reirioving  this  hill 
cannot  be  included  in  the  appraisal,  for  it  is  contrary  to  our  as- 
sumptions, inasmuch  as  the  hill  no  longer  exists.  So  much  for  the 
hill.  If  the  tracks  were  reproduced  under  existing  conditions,  it 
would  be  necessary  to  remove  a grea-t  dea.1  of  paving  in  order  to 
lay  them,  and,  if  we  stick  to  our  assumiptions , this  cost  could  be 
included  in  the  appraisal.  But  here  we  are  confronted  by  the  de- 
cision of  the  United  States  Supreme  Court  in  the  Des  Moines  gas 
cpvse  wherein  the  inclusion  of  the  cost  of  removing  paving  above 
mains  was  specifically  prohibited  unless  the  paving  actually  was 
disturbed  at  the  time  the  pipes  were  installed. 

In  a case  such  as  that  just  m.entioned  the  street  railway  comp- 
any would  lose  in  either  event,  unless  the  assumptions  be  changed 
so  as  to  include  the  cost  of  removing  the  hill.  So  far  as  I can 
see,  there  can  be  no  justice  in  thus  depriving  the  carrier  of  a 


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94 


return  on  the  cost  of  grading  down  the  hill,  for  the  money  was  le- 
gitimately spent.  On  the  other  hand,  the  inclusion  of  costs  of 
paving  that  was  not  disturbed  when  mains  were  laid  is  not  only 
good  law  hut  it  likewise  is  good  sense.  In  such  circumstances  the 
corapany  did  nothing  towards  paying  for  the  paving,  and  suffered  no 
outlays  necessitated  hy  the  installation  of  the  paving.  In  passing 
it  may  he  remarked  that  the  c[uestion  of  the  inclusion  of  the  hill 
arises  in  a large  proportion  of  street  railway  appraisals. 

Instances  of  nature  similar  to  the  foregoing  conflicts  of  as- 
sumptions with  facts  and  the  equities  of  particular  cases  are  fre- 
quent, and  many  pages  might  he  written  giving  exan:ples.  If  no  oth- 
er reasons  existed  for  condemning  such  reproduction  valuations,  the 
above  should  he  sufficient.  It  is  a general  rule  that  when  assump- 
tions lead  to  ridiculous  results  the  theory  must  he  abandoned.  The 
Ptoleroaic  theory  of  the  movements  of  the  heavenly  bodies  was  excel- 
lent until  its  assumptions  were  riddled  because  they  did  not  square 
with  the  facts.  The  fallacies  involved  in  the  assumptions  destroy- 
ed the  theory,  for  the  general  principles  could  not  he  changed  at 
will  to  suit  particular  conditions  that  arose.  This  stateriient  is 
likewise  correct  for  all  other  theories,  and  I am  unable  to  see 
why  the  ordinary  reproduction  theory  of  appraisa.1  should  form  an 
isolated  exception. 

The  cost  of  reproduction  of  a property  based  upon  average 
prices  prevailing  throughout  a term  of  years  has  the  inherent  de- 
fects of  which  the  above  exeusiples  are  illustrative.  In  addition. 


95 

they  have  some  oharacteristio  faults  not  possessed  hy  reproduction 
costs  at  present)  prevailing  prices,  ?or  example,  it  may  he  re- 
quired to  find  the  cost  of  reproduction  of  an  article  no  longer 
made,  such  as  a pump,  a particular  type  of  engine,  or  other  arti- 
cle, It  is  apparent  that  neither  can  the  article  he  presently  re- 
produced, noi?  can  five-year  avera,ge  prices  he  consistently  chosen 
to  represent  it.  To  all  intents  and  purposes  it  cannot  he  repro- 
duced, at  least  in  a reasonable  sense.  How,  then, can  average  costs 
of  reproduction  he  compiled?  I am  free  to  confess  that  1 do  not 
know,  unless  it  so  happens  tha.t  the  five  years  include  the  year  in 
which  the  articles  were  purchased,  a condition  that  seldom  happens. 
I have  had  the  experience  a number  of  times,  recently  in  the  case 
of  a steam  pump  that  is  still  in  service,  although  it  is  of  an  ob- 
solete type,  I solved  the  problem  hy  applying  to  the  actual  cost 
of  the  article  a ratio  representing  the  average  increase  of  vari- 
ous similar  pumps  during  the  five  years  included  in  the  price  per- 
iod, However,  it  is  clear  the  method  is  a mere  approximation  to 
the  theoretica.1  assumptions  necessary  to  the  basis  of  appraisal. 

Pven  worse  is  the  case  of  an  article  that  has  hut  recently 
come  upon  the  market.  For  instance,  the  writer  has  in  mind  the 
case  of  a duplex  exciter  ^driven  hy  either  steam  or  electricity) 
that  was  patented  as  late  as  1919  and  put  on  the  market  some  time 
in  1930,  in  determining  the  cost  of  reproduction  of  an  electri- 
cal property  there  were  used  the  averages  of  prices  prevailing 
during  a 10-year  period  prior  to  the  time  of  the  inquiry,  and  in- 


96 


eluding  the  year  in  which  the  exciter  was  put  on  the  market,  there 
arises  the  question  of  what  constitutes  the  10-year  average  price 
of  the  article.  Clearly  there  is  no  such  thing.  But  the  article 
is  a fact,  and  as  such  must  he  included  in  the  appraisal,  for  the 
company  uses  it  at  least  part  of  every  day  in  the  operation  of  the 
plant.  As  a practical  matter,  we  must  temporarily  scrap  our  the- 
ory of  reproduction  and  make  use  of  some  device  which  will  answer 
the  purpose  of  giving  the  exciter  its  proper  place  in  the  apprais- 
al, Again,  we  resort  to  the  hooks  of  the  utility,  find  out  the 
actual  cost  of  the  article,  and  apply  to  that  cost  a ratio  repre- 
senting the  approximate  averages  of  machines  of  the  sariie  class  as 
the  exciter,  such  as  motor-generators,  engine-driven  exciters,  or 
similar  units.  In  this  case,  two  things  are  very  apparent,  {!) 
that  our  theory  of  appraisal  will  not  work  in  this  case,  and  (S) 
that  the  average  cost  of  such  an  article  is  substantially  less  than 
the  actual  amount  paid  for  it,  because  it  was  purchased  at  the  peak 
of  prices.  As  I perceive  it,  an  injustice  was  done  the  company, 
heca-use  it  was  deprived  of  a part  of  the  cost  of  the  article,  and 
the  general  theory  underlying  the  appraisal  head  to  he  amended  in 
order  to  fit  a particular  case,  just  as  a p^tch  must  he  put  on  a 
pair  of  trousers  to  cover  a particular  hole.  A patched  theory,  as 
I see  it,  is  little  better  than  a pair  of  patched  trousers;  neith- 
er is  worth  much. 

The  two  examples  just  given  show  some  of  the  weaknesses  of  the 


97 


theory  when  applied  to  particular  situations,  hut  further  consid- 
eration thereof  cannot  here  he  given.  There  is,  hovfever,  a fur- 
ther injustice  that  is  occasionally  wrought  hy  average-price  repro- 
duction that  deserves  mention.  We  may  consider  the  case  of  a plant 
largely  constructed  during  the  yee,r  19EO,  when  prices  were  at  the 
peak.  It  is  a matter  of  statistics  that  prices  suhseq.uent  to  that 
year  were  much  less  than  obtained  during  that  period,  and  the  dif- 
ference was  much  greater  during  the  preceding  three  or  four  years, 
while  during  1920  costs  were  almost  double  those  prevailing  in 
1912  or  thereabouts.  Suppose  this  plant  were  valued  on  the  basis 
of  10-year  average  prices.  It  is  apparent  that  the  actual  invest- 
ment of  the  company  in  the  property  would  be  nearly  out  in  two,  to 
say  nothing  of  the  loss  in  depreciation,  for,  if  the  plant  ?;ere 
appraiaed  as  of  January  1,  1922,  there  would  he  a loss  of  value 
during  at  least  one  year  of  use.  I cannot  he  persuaded  that  jus- 
tice would. he  done  the  company  to  thus  confiscate  its  investment, 
for  that  is  the  practical  result.  In  other  v/ords,  the  theory  has 
done  injustice,  and  therefore  should  be  abandoned  for  that  partic- 
ular property.  Would  it  he  aiiy  more  just  to  the  public  if  the  mat- 
ter were  reversed?  I think  not. 

In  passing,  it  may  he  stated  that  no  utility  could  keep  its 
books  on  the  basis  of  reproduction  costs,  and  probably  none  ever 
tried  it.  it  readily  can  he  imagined  the  jumble  into  which  the 
books  would  fall  after  even  a short  trial  of  such  method,  and  by 
the  end  of  one  year  the  scheme  would  produce  chaos  in  the  affairs 
of  the  company.  Expenditures  for  ca,pital  account  would  become 


98 


nothing  hut  a meaningless  mass  of  computed  figures,  varying  with 
the  capability  of  the  man  who  made  them  and  reflecting  nothing  on 
either  land  or  sea.  Additions  and  betterments  would  become  a gro- 
tesciue  collection  of  amounts  from  which  little  of  value  could  be 
gleaned,  and  an  accountant  would  have  as  much  difficulty  in  ascer- 
taining the  condition  of  the  Plant  and  Investment  account  as  he 
would  encounter  in  finding  the  beginning  of  a circle. 

If  the  cost  of  reproduction  is  the  proper  basis  of  valuation, 
then  it  must  be  regretted  that  the  united  States  Supreme  Court  did 
not  exactly  define  what  constitutes  a reasonable  application  of  the 
theory, 

THuE  xiATE  BASE 

Having  pointed  out  certain  defects  in  the  ordinary  applica- 
tions of  the  reproduction  methods,  perhaps  it  will  be  well  to  see 
if  there  is  any  other  method  that  is  reasonably  free  from  serious 
clashes  between  assumptions  and  facts.  Based  upon  his  experience 
in  making  appraisals  and  in  practical  rate  fixing,  he  has  come  to 
the  conclusion,  previously  stated,  that  a fair  basis  of  appraisals, 
practically  free  from  the  major  defects  hereinbefore  discussed,  is 
found  in  the  undepreciated  investment,  wisely  made,  in  the  essen- 
tial property  used  in  supplying  the  services  furnished  by  the  util- 
ity, Heasons  for  this  belief  will  be  set  forth  in  detail  in  the 
following  discussion,  and  comparisons  made  with  the  various  inoon- 


99 


sistenoies  found  in  reproduotlon  methods.  Amounts  deterrained  in 
accordance  with  the  procedure  hereinafter  outlined,  I am  convinced, 
will  furnish  the  true  rate  base  in  any  rate  fixing  proceeding. 

In  amplification  of  the  definition  of  true  rate  'case  given 
in  the  preceding  paragraph  it  may  he  stated  that  "essential  prop- 
erty" includes  the  property  actually  used  and  useful  in  furnishing 
the  services,  and  reasonable  amounts  for  reserve  oa.pacity,  such  as 
lands,  machinery,  and  other  articles  necessary  to  provide  a con- 
tinuous and  reliable  service  in  accordance  with  generally  accepted 
standards  of  efficient  construction  and  operation.  There  shall 
also  be  included  proper  allowe,nces  for  overhead  costs  in  install- 
ing the  physical  plant,  together  with  sums  representing  any  intang- 
ible values  that  may  exist,  the  items  named  in  this  sentence  coi!>= 
monly  not  being  reflected  upon  the  books  of  utility  companies.  Un- 
der this  definition  there  is  intended  to  be  excluded  those  portions 
of  plants  built  in  excess  of  reasonable  req.nirements  and  also  all 
property  not  operated  by  reason  of  poor  physical  condition  or  not 
having  use  for  it • 

Principal  among  my  reasons  for  advocating  the  actual  invest- 
ment in  the  property  as  the  true  rate  base  is  that  that  amount  is 
a fact . a statement  that  cannot  be  made  of  any  reproduction  "val- 
ue". In  my  opinion,  a truth  derived  from  facts,  is  far  superior 
to  results  established  through  the  judgment  or  opinions  of  men, 
no  matter  how  competent  or  honest  they  may  be.  The  opinion  of  no 
human  can  possibly  be  preferable  to  an  actuality  established  by  a 


100 

seq,uence  of  events  that  are  heyond  controversy,  and  in  just  so  far 
as  we  remove  value  from  the  realm  of  opinion,  to  just  that  distance 
do  we  go  in  the  ascertainment  of  truth.  The  actual  cost  of  the 
various  items  of  property  is  the  one  outstanding  fact  that  can  he- 
determined  from  the  records  of  the  comppvny  within  a reasonable  de- 
gree of  accuracy.  Heproduotion  costs  are  never  found  there,  though 
they  may  he  found  in  the  catalogues  in  the  bookcase. 

In  the  determination  of  the  actual  investment  we  are  not  con- 
fronted with  the  necessity  of  shifting  our  basis  of  valuation  in 
order  to  make  it  sq^uare  with  assumptions  previously  made.  Thus, 
the  cost  of  clearing  and  grubbing,  discussed  on  page  91,  would  of- 
fer no  particular  difficulty  in  ascertaining,  at  least,  its  approx- 
imate cost,  and  this  element  of  cost  was  an  expenditure  req.uired 
of  the  company  just  as  much  as  was  the  grading  that  still  is  in  the 
roadbed.  And  upon  that  cost  the  company  is  entitled  to  a reason- 
able rate  of  return.  Again,  in  the  case  of  right  of  way  through  a 
city,  discussed  on  page  92,  it  is  utterly  impossible  to  determine 
the  reproduction  cost  of  blazing  a path  through  the  built-up  terri- 
■tory,  yet  we  can  determine  with  relative  accuracy  the  present  value 
of  the  lands  as  measured  by  the  worth  of  similar  surrounding  tracts 
Determination  of  the  actual  cost  of  placing  the  street  railway 
track  in  paving,  mentioned  on  page  93,  offers  no  special  difficulty 
as  it  will  likely  be  reflected  upon  the  books.  Similarly,  the  as- 
certainment of  the  actual  cost  of  the  obsolete  pump  or  of  the  du- 
plex exciter,  recently  patented,  entails  no  great  amount  of  troubiej 


101 


and  wreoks  no  theory  heoause  of  interferenoea  "between  theory  and 
f aot . Neither  would  injustice  he  done  a company  who  was  forced  to 
greatly  increase  its  facilities  during  the  peak  prices  of  1919  and 
1930.  In  brief,  the  determination  of  actual  cost  encounters  none 
of  the  pitfalls  of  the  reproduction  theory.  If  such  is  the  case, 
why  is  not  the  one  fact  thus  determined  much  superior  to  the  col- 
lection of  one  or  several  opinions?  It  is. 

But,  it  may  he  argued,  actual  cost  is  not  usually  shown  on  the 
hooks  for  the  entire  property.  That  such  is  the  case  cannot  he  de- 
nied, hut  that  the  failure  of  the  hooks  to  exactly  disclose  the  a- 
mount  seriously  vitiates  the  theory  or  practice  of  the  method  can- 
not, in  my  opinion,  he  maintained.  The  writer  has  had  occasion  to 
consult  the  hooks  and  records  of  many  utilities  companies,  and  it 
is  his  uniform  experience  that  the  costs  of  most  major  items  of 
property  are  clee-rly  reflected  upon  the  hooks,  For  example,  the 
rolling  stock  of  a street  railweiy  company  conmionly  comprises  from 
one-fourth  to  one-third  of  the  investment  in  the  plant,  yet  I never 
have  experienced  any  difficulty  in  ascertaining  q.uite  closely  the 
costs  of  such  eq.uipment.  Paving,  which  usually  amounts  to  about 
one-fifth  of  the  cost  of  the  property,  generally  can  he  determined 
within  a small  degree  of  error.  And  so  on  with  the  remaining  art- 
icles. As  nearly  as  I now  can  form  general  conclusions  in  the  mat- 
ter, 1 am  of  the  opinion  that  commonly  about  80^  of  the  cost  of  the 
property  is  directly  reflected  upon  the  hooks  of  the  company.  The 
remaining  30^  is  easily  determinable  within  about  5^  of  the  actual 
cost,  and  this  brings  the  probable  error  of  the  entire  determina- 


103 

tion  within  about  one  percent  (l,0/o)  of  the  total  value  of  the 
property.  Contrast  this  with  reproduction  methods  wherein  there 
ooinmonly  is  a difference  at  least  25  times  as  great.  That  is,  it 
would  he  more  nearly  a coincidence  than  an  agreement  of  judgment 
for  two  appraisals  made  hy  two  different  men  to  come  within  25^  of 
each  other. 

The  actual  cost  of  a public  utility  property  directly  reflects 
the  sPvCrifice  of  the  owners  for  the  benefit  of  the  public,  and  no 
other  method  of  appraisal  does  this  unless  we  consider  historical 
reproduction  accomplishes  the  end.  However,  throughout  this  dis- 
cussion I purposely  have  considered  historical  reproduction  nothing 
more  than  a method  of  ascertaining  actual  cost,  hence  do  not  look 
upon  it  as  reproduction  in  the  ordinary  a,cceptance  of  that  term. 

The  actual  cost  of  the  property  represents  the  money  spent  by  the 
owners,  and  reproduction  cost  does  not  even  pretend  to  do  that.  Of 
course  the  confusion  in  the  minds  of  courts  and  commissions  arises 
from  lack  of  differentia.tion  between  market  value  and  rate  making 
value.  In  the  minds  of  99  out  of  each  100  persons  there  arises  the 
question  of  how  much  a thing  v/ill  sell  for  whenever  its  "value"  is 
brought  under  scrutiny.  But,  as  previously  shov/n,  market  value 
has  little  or  nothing  to  do  with  rate  making  value,  the  former  be- 
ing dependent  upon  a number  of  factors  that  have  no  bearing  upon 
rates.  As  I see  it,  the  lack  of  discernment  of  the  difference  be- 
tween the  two  values  is  the  underlying  error  in  many  of  our  court 
decisions,  Certain  it  is  that  reading  many  of  them  inclines  me 
to  the  belief  just  stp.ted. 


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103 

Many  other  superiorities  of  actual  cost  over  reproduction 
"values"  could  he  discussed  with  profit,  hut  a few,  briefly  stated, 
must  suffice.  Books  of  all  firms  are  uniformly  kept  upon  the  bas- 
is of  actual  cost.  Ho  discussion  is  req.uired  to  show  the  bizarre 
results  of  undertaking  to  keep  them  upon  any  other  basis,  and  this 
q.uestion  is  also  touched  upon  at  page  97,  hence  further  comment  is 
not  req.uired.  Het  additions  and  betterments  naturally  must  be  made 
to  figures  showing  actual  cost  - any  other  basis  would  be  ludicrous j 
and  result  in  endless  confusion  to  the  bookkeeping  system  of  the 
company.  As  above  stated,  it  is  the  only  basis  not  subject  to  gross 
inconsistencies  as  between  facts  and  theories,  hence  gives  more  un- 
iform and  intelligent  results.  It  affords  a basis  that  appeals  to 
the  sense  of  Justice  of  the  ordinary  citizen,  for  it  is  the  only 
method  which  he  understands,  or  upon  which  appeal  con  be  made  to 
him.  The  arguments  in  favor  of  this  or  that  method  of  "higher  val-  : 
nation"  are  completely  lost  upon  the  ordinary  citizen.  He  neither 
comprehends  them  nor  oa.res  to  take  the  time  to  master  even  the  rud- 
iments attached  to  valuation  methods  other  than  the  determination 
of  actual  cost.  This  is  my  Judgment,  for  1 have  seen  numerous  at- 
tempts made  to  perform  the  feat,  and  i never  have  seen  it  succeed. 

He  ma.y  accept  the  decisions  of  courts  and  commissions  which  discuss 
the  pros  and  cons  of  the  various  theories,  but  invariably  it  will 
develop  that  he  has  only  one  anchor  to  his  mind,  and  that  is,  the 
money  invested  in  the  enterprise.  That  he  understands  and  nothing 
more.  And  it  requires  no  argument  to  convince  him  that  the  company 


104 

should  have  a reasonable  return  on  that  amount . But  you  oannot 
bring  him  to  admit  that  the  reasonable  return  should  be  made  upon 
some  other  amount,  determined  upon  a set  of  assumptions  for  per- 
forming certain  work  in  a specified  way,  that  never  can  be  per- 
formed nor  will  it  ever  be  for  the  reasons  that  conditions  will 
never  be  the  same  again  as  they  were  at  the  time  the  article  was 
installed.  Why  build  fancy  castles  on  a sand  foundation  that  is 
given  to  change  with  every  blast  of  the  wind?  It  is  a waste  of 
time  and  money. 

Outside  of  the  courts  there  probably  is  no  force  of  govern- 
iTient  that  has  as  wide  jurisdiction  in  the  determination  of  values 
of  public  utilitiy  properties  as  have  the  state  commissions.  In- 
deed, but  a very  small  fraction  of  the  oases  reaching  the  commis- 
sions are  carried  to  the  courts  for  final  settlement  of  q.uestions 
of  value.  Hence,  we  properly  may  regard  the  attitude  of  the  com- 
missions as  of  paramount  importance  in  the  matter,  and  it  is  to  be 
regretted  that  there  exists  such  a want  of  uniformity  of  opinion 
among  them  upon  this  vital  subject.  I cannot  but  believe  that  if 
the  commissions  showed  a better  understanding  of  the  principles 
underlying  appraisals,  this  greater  knowledge  would  be  reflected, 
in  due  course  of  time,  in  a changed  conception  of  the  problem  on 
the  part  of  the  courts.  For,  when  all  is  done  and  said,  the  courts 
can  decide  issues  only  upon  the  evidence  presented  to  them,  and  if 
they  find  no  substantial  agreement  among  those  who  should  know 
what  constitutes  correct  value  for  rate  making,  they  cannot  be 


105 

TDlomed  if  their  decisions  lack  the  niceties  that  come  from  a thor- 
ough understanding  of  the  fundamentals  involved.  Por,  after  all, 
the  cLuestion  is  highly  technical,  and  we  cannot  expect  our  courts 
to  reflect  the  subtleties  of  these  questions  when  the  members  of 
the  bench  and  bar  have  but  limited  experience  with  them.  They 
must  depend  upon  those  trained  in  that  special  field  to  furnish 
the  evidence  upon  which  can  be  built  thoroughgoing  and  logical  o- 
pinions  or  decisions,  just  as  the  engineer  or  other  citizen  must 
look  to  skilled  lawyers  to  interpret  the  statutes  or  legal  pro- 
cedure. Therefore,  in  my  opinion,  the  commissions  should  under- 
take some  line  of  common  endeavor  looking  to  the  training  of  some 
uniformity  of  thought  ebnoerning  issues  so  vital  as  that  of  value 
of  property  undergoing  rate  making  inq.uiry. 

While  the  basis  of  valuation  in  use  by  each  commission  hPvS 
already  been  briefly  stated,  nevertheless,  in  order  that  no  mis- 
understanding may  arise  concerning  the  various  attitudes  assumed 
by  them  on  questions  of  value,  I deem  it  advisable  to  quote  the 
reply  to  questions  3 and  4 in  full,  so  that  the  reader  may  also 
be  able  to  judge  for  himself.  The  answers  received  to  these  ques- 
tions in  my  letter  of  January  16,  1923,  are  as  follov/s: 

Arizona:  "Reproduction  value  has  been  given  preference  as 

a rate  base." 

QPvlif ornia:  "While  the  Commission  has  not  adopted  officially 

any  particular  basis,  it  generally,  particularly  in  rate  fixing 
proceedings,  determines  the  depreciated  reproduction  value,  to- 
gether with  the  present  value  of  the  physical  used  and  useful 
properties  of  the  utility,  adding  thereto  such  intangible  values 
as  Court  decisions  have  decreed  have  a value  which  must  be  includ- 
ed in  a rate  base." 


106 


Colorado : "Generally,  an  original  cost  iDasis  has  been 

sought  in  establishing  a rate  base,  Freq^uently,  both  reproduction 
new  cost  and  original  cost  have  been  used  in  evidence  and  given 
consideration;  and,  in  several  recent  cases,  reproduction  new  cost 
appears  to  have  been  favored, 

Florida:  "Inclined  to  give  more  weight  to  s-ctual  investment" 

Hawaii ; Q If  none  has  been  adopted  officially,  does  the  Com- 
mission advocate  or  give  preference  to  a particular  basis?  A 
"Original  Cost",  Hote:  "ITo  formal  valuation  or  appraisal  has  ever 
been  made  in  Hawaii." 

Idaho : "In  general,  for  the  establishment  of  the  physical 

base,  we  follow  what  is  sometimes  termed  the  split  period  method, 
but  which  really  is  an  allowance  of  actual  cost,  of  the  time  of 
construction  of  service  property,  with  present  value  as  to  real 
estate.  Intangible  elements  vary  so  widely  in  the  oases  of  differ- 
ent classes  of  utilities,  as  well  as  between  individual  utilities 
of  a given  class,  that  no  rule  can  be  announced  which  would  be 
workable  to  which  would  not  attach  more  exceptions  that  would  be 
covered  by  the  rule  itself," 

Indiana:  "Ho  preference  ha.s  been  given  any  particular  bas- 

is, each  appraisal  being  made  in  a-coordance  with  the  particular 
facts  involved  in  each  case.  Accrued  depreciation  is  deducted  from 
the  depreciable  property  in  determining  the  rate  base," 

Maine : "Oommission  has  in  the  past  given  preference  to  re- 

production cost  based  on  5-year  averages," 

Maryland:  "The  Oommission  is  now  engaged  in  a valuation  of 

the  property  of  Consolidated  Gas,  Electric  Light  and  Power  Company, 
of  Baltimore,  which  valuation  is  being  made  on  a reproduction  bas- 
is, at  the  req.uest  of  the  company.  The  Commission  cannot,  of 
course,  say  at  this  time  7/hat  weight  will  be  given  to  this  valua- 
tion in  its  determination  of  the  final  valuation  for  rate  making 
purposes," 

Mas s ac hu s e 1 1 s : "The  basis  adopted  is  the  honest,  original 

investment;  tlierefore,  it  is  necessary  to  go  into  the  history  of 
the  property, 

Missouri : "The  Commission  gives  preference  to  the  appraisal 

based  on  actual  cost  to  the  company  at  the  time  of  construction, 
with  the  exception  of  land  which  is  appraised  on  the  basis  of  its 
present  market  value." 


107 


He'brp-Bka;  "In  making  a valuation  of  a pu'blic  utility  prop- 
erty the  Commiosion^s  engineering  depa,rtment  in  its  report  shows 
the  original  oost  value  and  the  original  cost  less  deprecis^tion 
value.  5tou,  of  course,  understand  that  other  factors  entering  in- 
to present  fair  values  of  properties  are  given  consideration  by 
the  Commission.” 

Nevada:  ’’This  Commission  has  not  adopted  any  particular  has— 

is  of  appraisal  for  public  utility  properties;  each  case,  as  it 
must,  standing  upon  its  ov/n  peculiar  circumstances,” 

Uev/  Ham-pshire;  ’’The  commission  gives  a good  deal  of  weight 
to  the  actual  cost  of  construction  of  the  properties  in  use  in  the 
public  service  when  it  is  definitely  known;  also  to  reproduction 
cost  and  reproduction  cost  less  depreci potion,  especially  when  the 
actual  cost  is  not  known.  The  unit  prices  used  in  valuation  are 
usually  an  average  of  5 or  10  consecutive  yesj?s  variously  selected 
so  as  to  give  the  approximate  cost  of  the  property  in  the  instant 
case.  Going  value,  results  of  opers-tions,  and  all  matters  having 
any  relation  to  value  are  duly  considered  and  the  fair  value  fixed’.’ 

ITew  lork:  ^Albany)  ’’The  basis  of  submission  of  an  inventory 
and  8>ppraisal  to  the  Commission  is  required  upon  the  basis  of  o- 
riginal  cost  where  obtainable  or  upon  estimated  original  oost  where 
the  records  showing  same  are  not  obtainable.” 

IjTorth  Dakota;  "This  Commission  has  adopted  a so-called  His- 
torical Cost  Basis  for  valuing  public  utilities  for  rate  making 
purposes.  Historical  cost  in  the  sense  that  It  attempts  to  arrive 
at  the  year  of  installation  of  any  particular  part  of  a utility's 
property,  and  to  price  that  equipment  with  labor  a,nd  material 
prices  current  in  tha-t  year.” 

Ohio ; "Since  March  29,  1917,  this  Commdssion  has  used  ’the 
fair  price  obtaining  over  the  five  yea,r  period  preceding  the  date 
of  the  appraisal  in  appraising  properties  of  public  utilities  for 
rate  making  purposes.'  Effective  the  23rd  day  of  this  month  ^ Jan- 
uary, 1922)  the  basis  of  pricing  will  be  changed  to  the  date  cer- 
tain price.  Accrued  depreciation  is  always  deducted  in  all  rate 
cpJculations . The  present  value  of  land  is  used  in  all  rate  calcu- 
lations." 

Pennsylvania;  "The  Commission  has  not  adopted  any  generval 
rules  relating  to  appraisal  nor  has  it  adopted  any  particular 
basis.  Each  case  is  decided  on  its  individual  circumstances." 


— 1 


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108 


South  Dakota;  "Oost  of  reproduotion  new.”  Accrued  deprecia- 
tion is  deducted. 

Tennessee : "In  considering  Rate  Base,  the  Ooirnnission  has  en- 

deavored to  follow  the  recognized  principles  laid  down  hy  the  Su- 
preme Court  of  the  United  States  in  its  decisions  and  the  courts 
and  conimissions  of  other  states,  keeping  in  view  the  fact  decided 
hy  Supreme  Court  that  a Commission,  in  fixing  the  value  of  raue 
"base  is  not  controlled  hy  any  fixed  rules  or  formulas,  hut  is  gov- 
erned hy  the  facts  in  each  case.  The  Comiiiission  exercises  a reas- 
onable judgment  after  full  and  due  consideration  of  all  relevant 
facts.  In  fixing  valuation,  the  Commission  ascertains  the  original 
or  historical  cos^,  estimates  of  reproduotion  new,  estimate  of  re- 
production cost  new  less  depreciation,  and  other  elements.” 

Texas : We  have  adopted  no  defined  basis  of  value  for  rate 

purposes  ^ ^ are  not  q.uite  sure  that  a fixed  rule  can  he  set 

UX3  for  fixing  such  values.  Such  action  would  limit  freedom  of 
judgment  of  individual  oases  to  a measurement  hy  a ya,rd  stick.  It 
seems  to  us  better  to  handle  this  matter  ^ ^ With  respect  to 
natural  gas  utilities,  jurisdiction  has  hut  recently  been  confer- 
red upon  this  Commission  and  hut  two  or  three  ca.ses  have  come  up 
to  us  for  decision,  our  jurisdiction  being  upon  appeal  only.  In 
these  cases,  we  hs,ve  ascertained  the  cost  of  the  property,  the  cost 
to  reproduce  at  the  time  of  the  inq.uiry,  a,nd  the  cost  to  reproduce 
less  depreciation,  From  these  figures  we  reach  a judgment  as  to  the 
value  to  he  used  as  a rate  base,  which  value  may  not  he  any  of  the 
above  bases  * * , The  writer  is  inclined  to  the  belief  that  the 

Value  which  nearest  approaches  to  justice  to  all  concerned  is  that 
value  which  nearest  approaches  the  legitimate  actual  investment, 
that  is,  the  money  which  has  gone  into  the  creation  of  the  proper- 
ty, The  courts  do  not  sustain  such  judgment  if  such  value  does 
not  represent  the  ’value*  at  the  time  of  the  inq.uiry;  hut  what  the 
vsiLue  at  the  tim.e  of  the  iniiuiry  is  is  not  defined  and  must,  in 
the  light  of  decisions,  represent  the  judgment  of  the  tribunal  be- 
fore which  a case  is  heard  of  the  value  when  all  conditions  are 
taken  into  account.  The  cost  to  reproduce  the  property  is  a fluc- 
tuating base,  rising  and  falling  with  the  costs  of  labor  and  ma- 
terials; yet  it  is  advocated  as  the  best  measure  of  the  value  at 
the  time  of  the  inquiry.  A rate  should  be  reasonably  stable,  and 
it  cannot  be  so  and  follow  a fluctuating  base.  The  cost  to  repro- 
duce, less  depreciation,  is  subject  to  the  same  criticism,  and, 
moreover,  has  the  wep.kness  of  being  an  estima,te  upon  opinion,  or, 
to  put  it  bluntly,  a guess,  as  no  absolute  measure  of  depreciation 
Cfin  be  established;  and  it  further  introduces  the  q.uestion  of  con- 
sideration of  accrued  depreciation.  If  accrued  depreciation  has 
been  earned  from  the  rate  and  there  has  been  set  aside  a deprecia- 
tion fund  for  the  amortization  of  the  property,  such  deprecia,tion 
may  in  justice  be  deducted  from  the  value  at  the  time  of  the  in- 
(luiry.  If  it  has  been  earned  and  distributed  to  the  stockholders 
in  dividends  or  used  in  plant  expansion  or  extension,  the  case  is 
not  altered,"  (Signed)  R.D. Parker,  Chief  Engineer  Gas  Utilities. 


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109 


Virginia.:  "Mainly  pre-war  reproduotion  plus  additions  at 

war  and  post-war  prices." 

Washington:  "It  is  the  practice  of  the  Engineering  and  Aud- 

iting Section  to  submit  the  following  items  in  a valuation  proceed- 
ing: 

a.  Cost  of  property  a.s  shown  by  the  utility’s  records, 

b.  Fstima,ted  cost  of  construction.  This  is  arrived  at  by  the 

split  inventory  method,  using  unit  prices  applicable  to 
the  several  periods  into  which  the  inventory  is  divided. 

c.  Estimated  cost  of  reproduction.  This  is  arrived  at  by  us- 

ing unit  prices  as  of  the  date  of  the  report  or  average 
unit  prices  over  a reasoneible  construction  period  term- 
inating on  the  da,te  of  the  report. 

d.  Cost  of  reproduction  less  theoretical  accrued  depreciation. 

This  department  has  never  deducted  accrued  depreciation  in  de- 
termining the  rate  base." 

Wisconsin:  "The  Commission  has  not  officially  adopted  any 

particular  basis  of  appraisa.1  in  so  far  as  any  definite  commitment 
to  such  basis  is  concerned.  In  general,  however,  it  uses  a basis 
designed  to  reflect  as  nearly  as  possible  the  actual  investment. 
During  recent  years  it  has  used  a ten  year  average  of  prices  prior 
to  the  war  for  property  which  was  in  existence  at  the  beginning  of 
the  war  and  actual  prices  so  far  as  determinable  for  property  put 
in  during  the  war  period.  * * * Accrued  depreciation  is  not  deduc- 
ted in  determining  the  rate  bases  where  properties  have  been  prop-  , 
erly  maintained  * * * " . 

Wyoming : The  Commission  has  not  adopted  any  piarticular  basis, 

nor  does  it  give  preference  to  any. 

From  the  foregoing  it  appears  that  the  statement  made  by  me 
in  the  last  paragraph  on  page  85  " * * * it  appears  that  the  state 
regulatory  commissions  overwhelmingly  favor  the  undepreciated  ac- 
tual cost  of  a utility  property  as  the  proper  amount  for  the  rate 
base"  is  not  too  strong.  In  this  connection,  attention  is  partic- 
iarly  drawn  to  the  excerpt  from  the  letter  of  the  chief  engineer 
of  gas  utilities  of  the  Texas  commission.  In  that  letter  Mr.  Park- 
er has  q.ui'oe  lucidly  set  forth  some  striking  facts  connected  with 


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110 


the  determination  of  rate  ha-se  and  coordinated  questions. 

In  Re  Rates  of  the  Public  Service  Gas  Company,  the  Hew  Jersey 
Commission  stated: 

"We  are  inclined  to  estimate  the  value  of  the  physical  prop- 
erty hy  using  all  available  information  with  regard  to  values; 
and  especially  are  we  inclined  to  accept  as  a measure  of  value  for 
all  the  physical  property  of  the  company  the  unit  costs  to  the 
company  for  that  part  of  the  property  constructed  during  the  past 
eight  years."  1 H. J.B .P.U.0.433. 

Touching  upon  this  matter,  in  the  Western  Advance  Rate  Case, 
20  I.C.C.Rep.  307,  the  Interstate  Commerce  Commission  stated: 

"Perh.aps  the  nearest  approxima,tion  to  the  fair  standard  is 
that  of  bona  fide  investment  - the  sacrifice  made  by  the  owners 
of  the  property  - considering  as  a part  of  the  investment  any 
shortage  of  return  that  there  may  be  in  the  early  years  of  the 
enterprise.  Upon  this,  taking  the  life  history  of  the  road 
through  a number  of  years,  its  promoters  are  entitled  to  a reas- 
onable return.  This,  however,  manifestly  is  limited;  for  a re- 
turn should  not  be  given  upon  wastefulness,  mismanagement  or  poor 
judgment,  and  alv/ays  there  is  present  the  restriction  that  no 
more  than  a reasonable  rate  should  be  charged." 

Where  properties  have  been  normally  maintained  and  excessive 
earnings  have  not  been  had,  no  deduction  from  rate  base  should  be 
made  because  of  accrued  depreciation  in  the  plant.  This  is  just 
and  right  for  the  simple  reason  that  the  investment  in  the  prop- 
erty does  not  depreciate  even  though  there  be  loss  in  the  physical 
items  because  of  use,  exposure  to  the  elements,  obsolescence,  and 
other  factors  of  deterioration.  It  is  manifest  the  physical  plant 
cannot  be  kept  in  100  percent  condition,  for  decay  begins  the  morris 
ent  the  articles  are  put  into  use,  and  continues  until  they  no 
longer  are  of  service.  However,  in  the  interim  they  may  be  render 
ing  100  percent  service,  and  thus  be  fully  as  good  for  use  as  a 


Ill 


new  set  of  articles  of  the  same  kind.  As  a matter  of  fact,  the 
normal  operating  condition  of  a plant  may  he  100  percent  and  its 
physioa.l  condition  75  percent,  while  it  seldom  is  above  78  per- 
cent in  the  best  maintained  plants.  But  the  investment  in  the 
articles  still  in  service  has  not  decreased,  hence  the  rate  base 
should  not  be  lessened  by  reason  of  accrued  depreciation  unless 
there  has  been  mismanagement , excessive  earnings  without  proper 
provisions  in  the  way  of  a depreciation  reserve,  or  similar  cause. 
So  clep-r  is  the  justice  of  these  statements  that  further  argument 
thereon  is  considered  unnecessary. 

In  closing,  the  v/riter  desires  to  make  plain  that,  in  the  ad- 
vocacy of  the  s,ctual  investment  in  the  property  as  a proper  rp.te 
making  base,  he  does  so  from  no  motive  of  unduly  reducing  the  val- 
ue of  a public  utility  property.  On  the  contrary,  he  is  a firm 
believer  in  the  liberal  treatment  of  such  properties,  not  only  as 
a matter  of  justice  but  also  as  a mep,sure  of  benefit  to  the  con- 
sumers of  the  services.  It  has  been  my  uniform  experience  that 
by  far  the  larger  proportion  of  persons  prefer  good  service  at  a 
fair  price  than  poor  service  at  a low  price,  for  in  the  former 
case  there  is  not  only  a real  saving  in  money  but  there  is  an  ad- 
ded staisfaction  tha,t  is  not  present  when  the  consumer  is  burden- 
ed with  poor  service,  A poverty-stricken  public  service  corporsu- 
tion  is  a pitiable  object,  unable  to  properly  fulfill  its  duty  to 
either  its  stockholders  or  the  public,  and  far  better  is  it  that 
they  be  permitted  a liberal  e.arning  than  that  they  be  subjected 


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112 

to  judicial  starvation  by  reason  of  the  action  of  a narrow-minded 
regulatory  commission  which  mistakenly  thinks  it  thereby  is  "sav- 
ing the  people".  For  in  the  end  such  tactics  not  only  grieviously 
injure  the  utility,  but  they  force  upon  the  consumers  an  unsatis- 
fpvCtory  service,  or  may  even  deprive  them  of  it  altogether.  And 
modern  life  without  these  services  is  almost  unthinkable,  as  may 
be  easily  brought  to  mind  by  even  such  a slight  mishap  as  the  blow- 
ing of  the  fuse  in  the  circuit  which  furnishes  your  home  with  elec- 
tric light. 

In  my  opinion,  the  proper  way  to  dispose  of  the  q.uestions  in- 
volved in  the  determination  of  rates  and  values  is  the  fixing  the 
rate  base  at  the  undepreciated,  honest  investment , innthee essential 
property  used  in  furnishing  the  service,  p.nd  then  permitting  the 
company  to  ea.rn  such  return  thereon  as  shall  insure  its  financial 
stability  and  attract  the  capital  that  from  time  to  time  may  be  re- 
q.uired  to  care  for  extensions  and  the  upkeep  of  the  plant.  A pros- 
perous utility  is  a direct  asset  to  the  community  which  it  serves, 
and  every  encouragement  should  be  given  it  in  the  endetwor  to  sup- 
ply its  patrons  with  reliable  service  at  a reasonable  price. 


Chicago,  Illinois 
Ma.rch  15,  1928. 


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